2009 (10) TMI 639 - ITAT MUMBAI

Disallowance of development expenses - Expenditure on know-how - Assessee claimed both the expenditure as revenue expenditure u/s 37(1) - whether the claim of the assessee is allowable u/s 37(1) or u/s 35AB of the Act - submission of the assessee is that the he paid the payment to M/s. Hawtal Whiting & Engineering Company Ltd., UK for improving the ride and handling comforts of its existing 2 wheel drive/4 wheel drive utility vehicles. These expenses are in the nature of development expenses for improving the performance of existing product i.e., utility vehicle - AO rejected the assessee’s contention and held that the payments were made for providing technical know-how services by M/s. Hawtal Whiting & Engineering Company Ltd., UK, therefore, the expenditure is covered u/s 35AB - CIT(A) confirmed the order of the AO.

HELD THAT:- If we consider the fundamental concept of section 35AB and section 37(1), we are of the view that any expenditure not being expenditure in the nature of capital expenditure or personal expenditure laid out or expended wholly and exclusively for the purpose of business is allowable expenses in computing income chargeable under the head ‘Business or profession’.

Since in the case under consideration, the expenditure claimed by the assessee is revenue in nature, therefore, the same is allowable u/s 37(1) of the Act and not u/s 35AB of the Act. The above view is supported by the fact that the Finance (No. 2) Act, 1998 introduced from the assessment year 1999-2000 onwards, the concept of allowance of depreciation on intangible assets like know-how, patent rights, copyrights, etc. As a consequence, sub-section (1) was also amended so as to provide that any expenditure of capital nature incurred on or after 1-4-1998 on the acquisition of know-how used for the purposes of business shall not qualify for deduction under the said section 35AB. Such capital expenditure incurred after 31-3-1998 would be eligible for depreciation allowance. We, therefore, set aside the orders of the revenue authorities and allow the claim of the assessee. Accordingly, ground Nos. 5 and 6 of the assessee are allowed.

Disallowance on payment to MSEB - assessee claimed that the payment was made to MSEB for additional power as a non-refundable consumer contribution/service charges and that the property of cable and related accessories was with MSEB - AO held that since the assets were required for the specific use of the assessee at their own site and their own requirement, the expenditure is capital in nature, on which, the AO allowed depreciation at 25 per cent. - CIT(A) confirmed the action of the AO.

HELD THAT:- In Indian Molasses Co. (P.) Ltd.’s case[1970 (8) TMI 9 - SUPREME COURT], the Supreme Court pointed out that the word "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning and it is with this meaning that one is concerned. "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably.

The Apex Court in CIT v. Nainital Bank Ltd.[1966 (9) TMI 46 - SUPREME COURT] held that in its normal meaning, the expression "expenditure" denotes "spending" or "paying out or away", i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not "expenditure"; it is only when he satisfies the obligation by delivery of cash or property or by the settlement of accounts, that there is expenditure. Further, mere payment by itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be paid for commercial considerations.

Therefore, we find that the expenditure incurred is not capital expenditure nor it is expenditure in the nature of personal. On account of these expenditures, there was no addition to the capital assets of the assessee and there is no change in the capital structure of the assessee. The amount is in respect of availing additional power facilities i.e., commercial consideration, which is in the nature of revenue expenditure laid down and expended wholly and exclusively for the purpose of business; therefore, the same is allowable. We accordingly, allow the claim of the assessee.

In the result, both the appeals are partly allowed for statistical purposes.