1. ITA No. 2245/Del/1999 is an appeal by the assessee and ITA No.2143/Del/1999 is an appeal by the Revenue, and both the appeals are directed against the order of CIT(A)-I, Meerut, dt. 26th Feb., 1999, relating to the asst. yr. 1991-92.
2. First, we shall take up the appeal of the assessee, i.e., ITA No.2245/Del/1999 for consideration.
3. Grounds No. 1.1 to 1.4 of the grounds of appeal of the assessee read as follows : "1.1 That the CIT(A) erred on the facts and in law in confirming the disallowance of Rs. 77,16,120 being advertisement expenses debited as deferred revenue expenditure in the books of account.
1.2 That the CIT(A) erred in holding that the expenditure in question does not pertain to the year.
1.3 That the CIT(A) erred on facts and in law in confirming the double addition of Rs. 29,51,509 being the deferred revenue expenditure written off in the books of account and added back by the appellant in its return of income.
1.4 That the CIT(A) erred in holding that the appellant is also not to be allowed any deduction of Rs. 29,51,509 as it has been voluntarily offered for taxation in the computation of income and no claim for its deduction has been made either at the assessment stage or at the appellate stage".
4. The assessee is a company, which is engaged in the business of manufacturing of mini-computers/micro-processor based systems, etc. The return of income for asst* yr. 1991-92 was filed by the assessee declaring a loss of Rs. 4,73,69,920. During the previous year the assessee had spent a sum of Rs. 77,16,120 towards advertisements costs relating to launching of a new product. In the books of account of the assessee, the entire expenses of Rs. 77,16,120 had been capitalised and only a sum of Rs. 29,51,909 had been debited to the P&L a/c and claimed as a deduction. In the computation of . income the assessee had added back Rs. 29,51,909 to the profit-as per P&L, a/c and claimed deduction of the entire sum of Rs. 77,16,120. According to the assessee, the expenditure on advertisement was revenue in nature and was fully allowable as a deduction in computing the income for the purpose of IT Act. The treatment given by the assessee in its books of accounts was by recognising this as a deferred revenue expenditure since the expenditure would result in benefit to the assessee which may extend beyond the previous year in which the same was incurred. The debit to the P&L a/c of only a portion of the expenses commensurate with the benefit that the assessee derives by incurring these expenses during the previous year was only in keeping with sound accounting policies and the same does not operate as an estoppel when claiming deduction of the whole expenditure as a revenue expenditure under the IT Act. The AO however rejected the claim of the assessee by passing a cryptic order which was to the effect that the assessee has admitted that the sum of Rs. 77,16,120 has been capitalised in the balance sheet. Therefore, there is no justification for claiming it as a revenue expenditure.
Thus, a sum of Rs. 77,16,120 came to be added to the loss declared by the assessee resulting in decrease in the loss declared by the assessee. It may also be mentioned here that the assessee had debited a sum of Rs. 29,51,909 in its P&L a/c and this sum was added back to the profit as per P&L a/c and the entire SUM of Rs. 77,16,120 was claimed as deduction. By disallowing the entire sum of Rs. 77,16,120 the AO has in effect disallowed a sum of Rs. 29,51,909 in excess of what has been claimed by the assessee as deduction. The disallowance at best could have been only Rs. 47,64,211 (Rs. 77,16,120 less Rs. 29,51,909).
5. The assessee preferred appeal before CIT(A) contending that expenditure on advertisement was revenue expenditure and was to be allowed as a deduction. It was also pointed out that the assessee treated only a part of the said expenditure as revenue expenditure for the previous year in its books of account in keeping with the recognised practice of accountancy to defer the expenditure over the period to which the benefits from incurring such expenditure is likely to flow. It was pointed out that under the IT Act there is no concept of deferred revenue expenditure and what is contemplated is that an expenditure is either capital or revenue expenditure. The fact that even the AO accepted that this expenditure was a deferred revenue expenditure can only lead to the conclusion that the expenditure was not capital in nature and ought to have been allowed in full. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) and Hindustan Commercial Bank Ltd., In re (1952) 21 ITR 353 (All)., "I have considered the arguments of the learned Authorised Representative as well as observations of the AO. Total expenses on advertisement incurred during the year were Rs. 1,06,68,029 (Rs. 77,16,120 + Rs. 29,51,909) out of which the appellant had treated Rs. 29,51,909 as pertaining to this year only and, hence, claimed them in the P&L a/c as revenue expenditure. The balance expenditure of Rs. 77,16,120 was treated by the appellant as relating to the subsequent assessment years and, hence, shown as deferred revenue expenditure. This sum of Rs. 77,16,120 was shown in the balance sheet on the asset side as prepaid expenses. However, in the return of income the appellant has given just the opposite treatment, i.e., surrendered Rs. 29,51,909 and claimed deduction of Rs. 77,16,120 which is totally unjustified. Looking to the nature of advertisement expenses which were mostly on advertisement in newspaper and magazines as well as preparation of advertisement material like films, blocks, slides, etc., I feel the bifurcation of advertisement expenses, as done by the appellant in the accounts, i.e., showing Rs. 29,51,909 as revenue expenses and Rs. 77,16,120 as deferred revenue expenses was fully justified. Here, I beg to differ from the findings of my predecessor for asst. yr. 1990-91. Though the deferred revenue expenses is not a capital expenditure but it is not an allowable deduction during the year as it does not pertain to this year. It is a prospective expenditure incurred in advance. Such expenditure can be claimed as revenue expenditure in subsequent assessment year only depending upon the year or years to which it pertains. Hence, looking to the facts of the case, the disallowance of Rs. 77,16,120 is confirmed. The appellant is also not allowed any deduction of Rs. 29,51,909 as it has been voluntarily offered for taxation in the computation of income as no claim for its deduction has been made either at the assessment stage or at the appellate stage." 7. Aggrieved by the order of the CIT(A), the assessee is in appeal before us. We have heard the submissions of the learned counsel for the assessee as well as the learned Departmental Representative. The learned counsel for the assessee submitted that the advertisement expenses being of a revenue nature the same ought to have been allowed in full. That there is no concept of deferred revenue expenditure under the IT Act. Reliance was placed on the following decisions : 8. It was also submitted that in assessee's own case for asst. yr.
1990-91 similar expenditure was allowed as revenue expenditure by the Tribunal in ITA No. 6900/Del/1995. It was brought to our notice that disallowance of Rs. 77,16,120 amounts to double addition to the extent of Rs. 29,51,909 since the assessee had itself added back Rs. 29,51,909 in the computation of income and claimed deduction of Rs. 77,16,120.
9. The learned Departmental Representative relied on the orders of the Revenue authorities.
10. We have considered the rival submissions. A copy of the computation of the total income for the asst. yr. 1991-92 is placed at pp. 20-21 of assessee's paper book. Perusal of the same indicates that the assessee had debited a sum of Rs. 29,51,909 in its P&L a/c and this sum was added back to the profit as per P&L a/c and the entire sum of Rs. 77,16,120, was claimed as deduction. By disallowing the entire sum of Rs. 77,16,120 the AO has in effect disallowed a sum of Rs. 29,51,909 in excess of what has been claimed by the assessee as deduction. The disallowance at best could have been only Rs. 47,64,211 (Rs. 77,16,120 less Rs. 29,51,909) for the reason that even as per the AO the expenditure to the extent of Rs. 29,51,909 was of a revenue nature as the benefit from incurring this expenditure resulted in benefit to the assessee to that extent during the previous year. Be that as it may, we may now consider the concept of deferred revenue expenditure. The reason for making the addition by the Revenue authorities below as capital expenditure was mainly for the reason that the assessee had treated the same as "deferred revenue expenditure" in its books of account and according to the Revenue authorities the said expenditure incurred on advertisement would result in benefits which will accrue to the assessee over a period of time beyond the previous year. So far as the treatment given by the assessee-company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. In this regard, we find that the assessee has treated the said expenditure as "deferred revenue expenditure" considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below, however, considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that it indicated the accrual of advantage to the assessee of enduring nature. Before we consider the relevance of the test of enduring benefits for ascertaining the nature of expenditure, it would be appropriate to find out the meaning and nature of the term "deferred revenue expenditure". The Institute of Chartered Accountants of India in its guidance note issued on the "terms used in financial statements" has defined the term "deferred revenue expenditure" as the expenditure for which payment has been made or liability has been incurred in a particular year, but which is carried forward on the presumption that it will benefit over a subsequent period or periods. The Institute of Cost and Management Accountants has defined the said term in its publication as an expenditure incurred during an accounting period but not fully charged against income in that period, the balance being carried forward and charged in the next or a subsequent period. From the perusal of these definitions, it is abundantly clear that there is nothing to indicate that the concerned expenditure has to be of capital nature for the purpose of treating the same as deferred revenue expenditure. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital field but the same accrues only in the revenue field. As a matter of fact, the very purpose of categorising certain expenditure differently under the head "deferred revenue, expenditure" for the purpose of drawing financial statements appears to be that the said expenditure even though is of revenue nature results into benefit of enduring nature to the assessee and the same, therefore, deserves a different treatment in terms of preparation of the annual accounts to determine, inter alia, the profit of a particular period/year as the benefit thereof accrues over a period exceeding the accounting year in which the same is incurred. It is thus clear that when any expenditure is treated as a "deferred revenue expenditure", it presupposes that the concerned expenditure, creating benefit in the revenue field, is a revenue expenditure but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. It is thus clear that the authorities below misconstrued the term "deferred revenue expenditure" as capital expenditure on the basis of accounting treatment given by the assessee in its books of account and proceeded to draw an adverse inference without considering the nature of the impugned expenditure as its allowability of the same under the provisions of the IT Act.
11. The Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v.CIT (supra), has observed as under : "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 principle laid down in this test.
What is material to consider is 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. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future." 12. From the perusal of the aforesaid observations of the apex Court, it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital field or revenue field so as to decide the exact nature of the said expenditure and allowability of the same under the IT Act.
13. As regards the relevance of accounting method followed by the assessee, we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered as different from the one followed for the purpose of computing the total income under the IT Act. In any case, as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entries made in the books of account, which are not decisive or conclusive in this regard.
14. The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the Revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct the AO to delete the addition of Rs. 77,16,120 made to the total income. Thus, grounds No. 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds No. 1.1, 1.2 and 1.4. 15. Grounds of appeal No. 2 and 2.1 of the assessee read as follow: "2. That the CIT(A) erred on the facts and in law in confirming the disallowance of Rs. 33,77,573 being provision for warranties as being unascertained, unincurred and contingent in nature.
2.1 That the CIT(A) erred on the facts and in law in not allowing deduction for provision of warranties amounting to Rs. 9,10,094 created in asst. yr. 1990-91 and disallowed in that year, which has been reversed in the year under appeal." 16. The assessee is in the business of manufacturing and sale of computers. The assessee offers one year warranty on each computer sold by it. The assessee in terms of the warranty has to provide free maintenance including replacement of parts within one year from the date of sale/installation of the computer. The assessee estimated its liability in respect of the warranty for the previous year at a sum of Rs. 42,87,667. For the previous year relevant to asst. yr. 1990-91, the assessee had provided for a sum of Rs. 9,10,094 towards estimated liability on account of warranty. There was no actual expenditure incurred whatsoever in the previous year relevant to asst. yr. 1991-92 in respect of the provision of warranty made in the previous year relevant to asst. yr. 1990-91. The assessee, therefore, wrote back this liability debited in the previous year relevant to asst. yr. 1990-91 and claimed a net warranty liability of only Rs. 33,77,573 (Rs. 42,87,667 - Rs. 9,10,094). The basis for estimating the liability for the previous year relevant to asst. yr. 1990-91 was 1.5 per cent of the total cost of sales and for the previous year relevant to asst. yr.
1991-92 it was 1.5 per cent of the cost of sales in respect of computers sold within the country and 5 per cent of the cost of sales in respect of computers exported. The AO was of the view that this liability of Rs. 33,77,573 was not to be allowed as a deduction as the liability was neither incurred nor was it ascertained, and was contingent in nature. The AO, therefore, disallowed the claim for deduction of Rs. 33,77,573. On appeal by the assessee, the CIT(A) confirmed the order of the AO observing that provision for warranties is a contractual liability which will crystallise only if a complaint is received from the customer and if no complaint is. received from the customer, no expenditure is to be incurred and hence such an expenditure was only a contingent liability. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
17. We have heard the learned counsel for the assessee as well as the learned Departmental Representative. The learned counsel for the assessee, while reiterating his claim as made before the Revenue authorities submitted that since the assessee was under an obligation to carry out free service and carry out repairs at its costs to the computers sold in case of any defect within the period of warranty, the assessee was bound or was committed to incur those expenses in the year of sale, though the assessee might actually incur those liabilities only in the following year. In other words, it was contended that the liability is in presenti though it has to be discharged in a future date. He drew our attention to the basis of ascertaining this liability adopted by the assessee copies of which are placed at pp. 25 to 28 of the assessee's paper book, and submitted that going by the provision made for these expenses in the year of sale and the actual expenditure incurred in the subsequent year, and the assessee writing back provision made in excess in the year of sale in the subsequent year when the actual expenditure is incurred, there can be no hesitation in accepting the mode of computing or ascertaining liability under this head as adopted by the assessee. For the proposition that liability debited to the P&L a/c if can be ascertained with reasonable certainty the same should be allowed as deduction he relied on the following decisions : (ii) IRC v. Mitsubishi Motors, New Zealand Ltd. (1996) 222 ITR 697 (PC) (iii) Majestic Auto Ltd. v. IAC in ITA No. 7/Chd/1988 (Chd Bench) RA made by Revenue dismissed as reported in CIT v. Majestic Auto Ltd. (1994) 48 TTJ (Chd)(TM) 566 : (1993) 47 ITD 1 (Chd)(TM) (iv) ITO v. Wanson (India) Ltd. [sic-VoItas Ltd. v. Dy. CIT] (1998) 64 ITD 232 (Bom) 18. The learned Departmental Representative relied on the orders of the Revenue authorities.
19. We have considered the rival submissions. The assessee follows the mercantile system of accounting. It is only the actual liability which accrued or arose during the previous year that can be considered as an expenditure deductible for income-tax purposes. A liability which is dependent on fulfilment of a condition cannot be allowed as a deduction unless the dependent condition is fulfilled during the previous year.
In the present case it is noticed that the assessee when it sells its computers manufactured by it, it confers on the purchasers the benefit of a warranty against defects appearing within the particular period.
The assessee also undertakes to provide free maintenance including replacement of parts within one year from the date of sale/installation of the computer. It estimated its probable liability on account of free maintenance and replacement of parts during the warranty period and claimed the same as a deduction. According to the Revenue-authorities, the liability was contingent upon a defect appearing and being notified within the warranty period. Till such time there is no liability in law and, therefore, the claim for deduction on account of estimated liability cannot be allowed. The Hon'ble Supreme Court in the case of Bharat Earth Movers v. CIT (supra) had an occasion to consider the claim for deduction on account of a contingent liability. The following principles were laid down by the Hon'ble Supreme Court : "If a business liability has definitely arisen in accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible; if these requirements are satisfied the liability is not as contingent one. The liability is in presenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." 20. Similarly, in the case of IRC v. Mitsubishi Motors, New Zealand (supra), the Privy Council had an occasion to deal with a claim for deduction on account of anticipated liability under warranty. It was a case of a car manufacturer who had undertaken to repair defects appearing within one year of delivery or until the vehicle has been driven for 22,000 kms. whichever period is shorter. The assessee car manufacturer sought deduction of its anticipated liability under the warranty remaining unexpired at the end of the year in which the vehicles were sold. The Privy Counsel held as follows : "The taxpayer's liability under, the warranty for each vehicle sold was contingent on a defect appearing and being notified to the dealer within the warranty period so that no liability was incurred by the taxpayer until those conditions were satisfied, regard could be had to its estimation of warranty claims based on statistical information which showed that as a matter of existing fact not future, contingency 63 per cent. Of all vehicles sold to the taxpayer contained defects likely to be manifested within the warranty period and require work under warranty; that since theoretical contingencies could be disregarded, the taxpayer was in the year of sale under an accrued legal obligation to make payment under those warranties and, even though it might not be required to do so until the following year, it was definitely committed in the year of sale to that expenditure; and that, accordingly, in computing the profits or gains derived by the taxpayer from its business in the year in which the vehicles were sold, the taxpayer was entitled under Section 104 to deduct from its total income and provision which it had made for the costs of its anticipated liabilities under outstanding warranties in respect of vehicles sold in that year." 21. Keeping in mind the principles laid down by the Hon'ble Supreme Court and also by the Hon'ble Privy Council, we shall now examine the facts of the present case. The summary of warranty provision made by the assessee for the various assessment years is as follows :-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Particulars Assessment year------------------------------------------------------------------------------------------- 1990-91 1991-92 1992-93 1993-94 1994-95---------------------------------------------------------------------------------------------Actual exp.
-- -- 16,97,658 33,88,805 40,76,935Less : Last yr's -- 9,10,094 21,15,166 16,72,250 30,04,572Add : Current 9,10,094 42,87,667 16,72,250 30,04,572 39,85,606Balance : Debited 9,10,094 33,77,573 12,54,742 47,21,127 50,57,969-------------------------------------------------------------------------------------------- 22. The basis of computation of the warranty for the asst. yr. 1990-91 was 1.5 per cent of the total cost of sales. In the asst. yr. 1991-92, which is the year in dispute in the present appeal, the provision has been made @ 1.5 per cent of the cost of sales in respect of goods sold within the country and 5 per cent on export sales. The assessee also wrote back the provision made for the asst. yr. 1990-91; from the estimated liability for asst. yr. 1991-92 and the difference alone is sought to be claimed as a deduction while determining the income for asst. yr. 1991-92. Even for the subsequent assessment year the provision on account of liability under warranty has been made on a scientific basis. Whatever provisions, have been made for a particular assessment year in excess the actual expenses incurred in the subsequent assessment year, the difference is again written back in the subsequent assessment year. In the light of the circumstances, a legal obligation to make a payment in future can be said to have accrued. It is not required to wait for the contingency to occur. We can infer that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day. The estimation by the assessee of its liability is reasonably certain. In the circumstances it can be said that the liability is in presenti to be discharged at a future date and not a contingent one. We, therefore, direct the AO to allow a sum of Rs. 33,77,573 claimed as deduction by the assessee.
"That the CIT(A) erred on facts and in law in confirming the disallowance on account of provision for royalty amounting to Rs. 49,37,042 on the ground that the tax on royalty has been paid in November, 1991, that is, during the previous year relevant to asst.
yr. 1992-93." 24. The assessee had a technical collaboration with M/s ING. C.OLIVETTI of Italy. As per the terms of the collaboratipn agreement the assessee had to pay royalty to the collaborator at 5 per cent of the net ex.-factory selling price of the licensed products. The assessee had made a provision to the extent of Rs. 47,70,089 in the P&L a/c.
This amount was inclusive of R&D cess. Subsequently, the assessee obtained a certificate from a chartered accountant for payment of royalty wherein the actual royalty payable after taking into account the income was determined at Rs. 44,77,151 and R&D cess at Rs. 1,56,700. The AO disallowed claim for deduction of this provision on the ground that the liability is unascertained. On appeal by the assessee, the CIT(A) confirmed the disallowance not on the basis adopted by the AO but on the basis that under the provisions of Section 40(a)(i) of the Act, royalty payment payable outside India shall be allowed as a deduction only if the tax payable thereon is deducted at source or paid under Chapter XVII-B of the Act. The CIT(A) noticed that it was only in November, 1991, falling within the asst. yr. 1992-93 that the assessee had deducted tax on this royalty payment and deposited in the Government treasury. The CIT(A), therefore, held that deduction can be allowed on the basis of actual payment as well as payment of tax at source as provided in Section 40(a)(i) of the Act.
25. Aggrieved by the order of the CIT(A), the assessee is in appeal before us. We have heard the rival submissions. The facts as they emanate from the records are that in the books of account in the previous year relevant to the asst. yr. 1991-92, the assessee had made a provision for royalty payable for the period from 1st Jan., 1990 to 31st March, 1991, at Rs. 47,70,089 and R&D cess at Rs. 1,66,953. The tax deductible on this payment at a sum of Rs. 14,31,028 was duly shown as deduction in the books of account on 31st March, 1991. Later on, the actual amount payable to the collaborator in terms of the collaboration agreement was worked out at Rs. 44,77,151 and R&D cess at Rs. 1,56,700.
This amount was paid in the previous year relevant, to the asst. yr.
1992-93, i.e., in November, 1991. At the time of making payment, tax deductible on this payment, namely, a sum of Rs. 13,43,145 was duly deposited to the credit of the Central Government within the time specified under the provisions of Chapter XVII-B of the Act. The provision of Section 40(a)(i) of the Act as it existed at the relevant point of time reads as follows : "Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business of profession'--(a) in the case of any assessee-- (i) any interest (not being interest on a loan issued for public subscription before the, 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B. Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted.
(A) 'royalty' shall have the same meaning as in Expln. 2 to Clause (vi) of Sub-section (1) of Section 9; (B) 'fees for technical services' shall have the same meaning as in Expln. 2 to Clause (vii) of Sub-section (1) of Section 9".
26. It is clear from the perusal of the provisions of Section 40(a)(i) that if royalty is payable outside India, tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head profit and gains of business and profession. In the present case the liability to pay the royalty had accrued and it was not contingent as held by the AO. The quantification had taken place at later point of time and this was not the event by which the liability became ascertained. As already observed by us, while making the provision the assessee had also made book entries in respect of tax deductible. The condition under Section 40(a)(i) was either deducting tax at the time of payment or making actual payment. If one of the conditions is fulfilled then the deduction is allowable." This Tribunal in the case of Minda HUF Ltd. v.Asstt. CIT in ITA No. 4753/Del/2002 [reported at (2004) 82 TTJ (Del) 305--Ed.] had an occasion to deal with a similar case and held as follows : "From a bare reading of Sub-clause (i), we are of the view that any payment of royalty for technical service which is payable outside India, shall not be deductible in computing the income chargeable under the head profits and gains of business and profession unless tax on such sum has been paid or deducted under Chapter XVII-B in the relevant previous year. It has also been clarified in the proviso that the deduction of such royalty amount shall be allowed in computing the income of the previous year in which such tax has been paid or deducted. The legislature has used the conjunction as 'or' which means if any one of the conditions is fulfilled, the assessee is entitled to claim deduction on the payment of royalty.
Had the legislature ever intended to make both the conditions imperative they would have used the conjunction 'and'. In this backdrop, we find force in the contention of the assessee that if the tax is deducted at source, during the year and is deposited before the due date which lies in the succeeding year, the assessee is entitled to claim deduction of the payment of royalty in that previous year in which the tax at source was deducted. We also find force in the contention of the assessee that if the payment was made late, the Revenue may take recourse of charging interest under Section 201(1A) of the Act but the deduction of royalty under Section 40(a)(i) could not be disallowed. We have also carefully examined the judgment of the Rajasthan High Court and the Tribunal's order which support the aforesaid view. We, therefore, do not find ourselves in agreement with the findings of the CIT(A). We, accordingly set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee." 27. For the reasons stated above, we are of the view that the Revenue authorities were not justified in disallowing the provision made for royalty. The addition made by the AO in this regard is directed to be deleted. The 3rd ground of the appeal of the assessee is allowed.
28. The 4th ground of the appeal of the assessee was not pressed; the same is dismissed as not pressed.
5. "That the CIT(A) erred on facts and in law in disallowing Rs. 2,62,394 on account of income-tax paid by the appellant on the salary of managing director, without appreciating that such payment was approved under the provisions of Section 10(6)(viia).
6. That the CIT(A) erred on the facts and in law in enhancing the assessment by directing the AO to restrict the value of perquisite given to the managing director to Rs. 45,000 only in complete disregard of the terms of the agreement duly approved by the Government of India and without giving the appellant an opportunity of rebuttal." 30. One Dr. L. Sella, an Italian national, was appointed as managing director, (he being a technician) by the assessee for implementation of various programmes relating to mini-computer/micro-processor based system for which the assessee owned the necessary industrial license, Under the provisions of s, 10(6)(viia) of the Act, as it stood during the asst. yr. 1991-92, any remuneration paid to a foreign technician will not form part of his total income, if the employer pays the tax payable on his income chargeable under the head salaries. The assessee has also obtained approval of the Government of India, Department of Electronics, for employment of foreign technicians in India. We may clarify at this stage that the approval by the Government of India has nothing to do with one of the issues that arises for our consideration in this ground of appeal. A copy of approval of the Central Government is placed at pp. 38 to 44 of the assessee's paper book. The approval contemplates payment of tax on the salary payable to Dr. L, Sella besides provision of accommodation and club fees.
31. The AO was of the view that a sum of Rs, 2,62,394 which represents income-tax paid on remuneration paid to Dr. L. Sella by the assessee was not to be allowed as a deduction since it was liability of the managing director. He further observed that rent for the premises in occupation of managing director was paid at Rs. 18,000 per month which in his opinion was excessive. He was of the view that Rs, 10,000 per month alone was admissible. Further, club fees paid to the managing director in the opinion of the AO was not to be considered as remuneration of the managing director. The AO thus disallowed a sum of Rs. 3,60,194. The disallowance was made by invoking the provisions of Section 40A(2)(b) of the Act.
32. On appeal by the assessee, the CIT(A) confirmed the disallowance of Rs. 2,62,394 representing income-tax paid by the assessee on behalf of the managing director. Regarding the disallowance out of club fees and rent free accommodation, the CIT(A) directed that all other perquisites be restricted to Rs. 45,000 only as mentioned in the letter of approval dt. 29th Jan., 1990. This approval letter we may clarify is nothing but approval of the Central Government under Sections 269, 198(4)/309(3) and 637AA of the Companies Act, 1956.
33. Aggrieved by the order of the CIT(A), the assessee is in appeal before us. We have considered the submissions of the learned counsel for the assessee as well as the learned Departmental Representative.
34. We shall first deal with the disallowance of a sum of Rs. 2,62,394 representing the income-tax liability of Dr. L. Sella which was borne by the assessee. As already stated, the approval of the appointment of Dr. L. Sella has nothing to do with the claim for allowability of this expenditure as a business expenditure. The law is well-settled that discharge of tax liability of others cannot be considered as an expenditure incurred in the conduct of business. Reference may be made to the decision of the Hon'ble Supreme Court in the case of CIT v.Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) in this regard wherein the assessee, a resident company, incorporated outside India, paid estate duty payable on the death of its shareholders not domiciled in India and claimed the same as deduction. The Hon'ble Supreme Court held that such payment has nothing to do with the conduct of business.
The Court also held that it does not make any difference if the payment is voluntary or statutory. The argument of the learned counsel for the assessee before us was that the tax paid was not to be construed strictly as a tax paid but as part of the remuneration paid to the managing director. We are unable to agree with this submission. The nature of payment made by the assessee cannot assume the character of remuneration paid to the managing director. As observed by the Hon'ble Supreme Court in the case of Malayalam Plantations (supra), the fact that it was paid under an agreement will not make the payment an expenditure in connection with the business of the assessee.
35. As far as payment of rent for accommodation of managing director and payment of his club fees is concerned, we find that the CIT(A) has relied on p. 2 of the letter dt. 29th Jan., 1990, of approval by the Department of Company Affairs, wherein perquisites have been restricted upto a maximum of Rs. 46,000 per annum. We notice from the copy of the said approval filed that these clauses have been struck off by "x" mark, meaning thereby that those clauses were not applicable to the case of the assessee. These payments were approved even by the Department of Electronics, which approved the appointment of foreign technician. The annexure to the approval by the Department of Company Affairs also specifies that housing and club fees will be paid subject to certain limitations. The club fees paid is, therefore, to be allowed as a deduction. As far as house rent paid is concerned, the case of the AO is that it is excessive and unreasonable. The AO has not brought enough material on record to prove this allegation and it was incumbent upon him to do so before making any disallowance. The deduction towards house rent and club fees is, therefore, directed to be allowed while the tax liability of the employee claimed as a deduction cannot be allowed as a deduction. Thus, ground No. 5 is dismissed while ground No. 6 is allowed.
36. The 7th ground of the appeal was not pressed and the same is dismissed as not pressed.
37. In the result, the appeal by the assessee is partly allowed. ITA No. 2143/Del/1993 "The learned CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 80 lakhs under Section 40A(2)(b) of the IT Act in respect of excessive and unreasonable payments made to the foreign collaborator against purchase of raw material ignoring the fact that the assessee has failed to furnish quantitative tally of such raw material and the rates on which such payments have been made. It may be noted that even before CIT(A) such details have not been furnished. Moreover, the assessee has failed to prove that the purchase from the foreign collaborator and its vendors were at the competitive rates and that these were excessive or unreasonable." 39. The assessee during the previous year purchased raw material from its collaborator M/s ING. C. OLIVETTI. A total sum of Rs. 2,08,30,600 was paid by the assessee to the foreign collaborator as per following details :Particulars AmountRaw material 1,44,39,570Technical know-how 6,54,772Royalty 31,34,006Export commission 26,02,252 40. The assessee pleaded before the AO that purchase of raw material from the foreign collaborator was necessary because the plant and machinery used by the assessee was based on patents and designs supplied by the collaborator. It was also pointed out that the purchases were effected from the collaborator and its approved vendors.
The AO was of the view that quantitative details of raw material purchased from the foreign collaborator and at the rate on which the payment was made have not been given by the assessee. He, therefore, concluded that the payment for raw material purchased, i.e., a sum of Rs. 1,44,39,570 was excessive payment. The AO disallowed a sum of Rs. 80 lakhs, which in his opinion was excessive payment. On appeal by the assessee, the CIT(A) deleted this addition. Before the CIT(A), the assessee submitted that the assessee had furnished quantitative details of raw material purchased and had also explained that the price charged by the collaborator was reasonable having regard to the business needs of the assessee. The assessee also brought to the notice of the CIT(A) that the customs authorities had in fact taken a stand that the raw material purchased by the assessee were under-invoiced. The Asstt.
Collector of Customs, however, held that the value determined by the assessee was correct value. It was argued before the CIT(A) that the AO had not brought anything on record to show as to how the price paid by the assessee was excessive or unreasonable having regard to the business needs of the assessee. It was submitted that in the absence of finding regarding the fair market value of the goods the AO was not competent to disallow any payment on the ground that it was excessive.
The CIT(A) while deleting the addition agreed with the submissions made by the assessee.
41. Aggrieved by the order of the CIT(A), the Revenue is in appeal before us We have considered the rival submissions. We do not wish to interfere in the order of the CIT(A). It was incumbent upon the AO while making a disallowance by invoking the provisions of s, 40A(2)(b) to spell out as to how the expenditure incurred by the assessee is excessive or unreasonable. In this regard the AO was expected to compare the fair market value of the goods for which the payment is made by the assessee. Perusal of the order of the assessment clearly shows that the AO has not discharged his onus. The AO has made a sweeping statement that the payment made is excessive. There is absolutely no record to justify his calculation. The CIT(A) was, therefore, justified in deleting the addition made by the AO by taking note of the other circumstances, namely, the allegation of under-in voicing by customs authorities and orders of the Asstt. Collector of Customs concluding that the value determined by the assessee is correct. Consequently, the first ground of the appeal of the Revenue is dismissed.
"The learned CIT(A) has erred in law and on facts in directing to allow 25 per cent of entertainment expenses as pertaining to employees' participation and to consider the balance for disallowance under Section 37(2A) ignoring the fact that the entertainment expenses in respect of employees are specifically excluded from the provisions of Section 37(2A). Hence, the entire amount of Rs. 3,29,400 shown by the assessee as relatable to provisions of Section 37(2A) shall be considered for this purpose and relief allowed by the CIT(A) is not admissible. Without prejudice to the above, the assessee has failed to produce any evidence to the effect of employees' participation in this regard." 43. It is not in dispute that identical issue had come up for consideration in assessee's own case in the asst. yr: 1990-91 in ITA No. 7010/Del/1995 and this Tribunal was pleased to hold that 30 per cent of the expenses incurred on entertainment was to be treated on account of employees' participation. The decision of the Tribunal is in line with the decision of the Hon'ble Delhi High Court in the case of CIT v. Expo Machinery Ltd. (1991) 190 ITR 576 (Del). Respectfully following the decision of the Tribunal, we uphold the order of the CIT(A) and dismiss the second ground of the appeal of the Revenue.