TMI Blog2005 (5) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. This ground of appeal can conveniently be decided together with ground No.3 of the Grounds of appeal of the Revenue in ITA 2906/Del./2000, which reads as follows: 3. That on the facts and in the circumstances of the case, the learned CIT(A), has erred in deleting the disallowance of interest claimed as to leased assets which is capital expenditure in nature." 3. The facts and circumstances under which the aforesaid grounds of appeal arise are as follows. The assessee is a company, which is engaged in the business of manufacture of motorcycles and its accessories. The assessee had incurred an expenditure of Rs. 81,42,285 during the previous year. The details of these expenditures were as follows: Interest on leased assets Rs. 51,73,540 Civil Work on Leased Assets Rs. 19,68,745 Management Fee paid to HDFC Rs. 10,00,000 ------------- Total Rs.81,42,285 ------------- The assessee entered into a lease agreement dated 11-3-1986 with M/s. HDFC whereby the assessee took certain items of plant and machinery on lease. Copy of the lease deed is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (b) That the interest paid on leased assets represented interest on amount advanced to the supplier of machinery and the payment of such interest during the intervening period, i.e., period before commencement of lease and payment of lease charges was also in the nature of interest akin to payment of interest on funds borrowed for the purpose of business. Reliance was placed on the decision of the ITAT, Delhi Bench, in ITA No. 6201/Del./92 in the case of Modi Xerox Ltd., dated 31-3-1999 wherein proposition to the above effect has been laid down. (c) That the civil work carried out by the assessee for carrying out installation of the lease assets does not result in any enduring advantage in the capital field since ownership of the asset never vests in the assessee and therefore such expenditure was of a revenue nature. Reliance was placed on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Alembic Chemical Works Ltd [1994] 206 ITR 170. (d) That the management fee paid to HDFC being in the nature of lease rent does not result in any enduring benefit to the assessee and was allowable as revenue expenditure in connection with the business. (e) That entrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) held that this payment has been made to acquire a benefit of enduring nature and the fee has to be treated as capital expense and found no reason to interfere with the action of the Assessing Officer. 7. Aggrieved by the order of the CIT(A) in confirming the order of the Assessing Officer, with regard to disallowance of expenditure on Civil work on leased assets and management fee paid to HDFC, the assessee is in appeal before us. Aggrieved by the order of the CIT(A) in directing the Assessing Officer to allow the claim for deduction of expenditure on leased assets, the Revenue is in appeal before us. 8. We have heard the rival submissions. As far as assessee's ground of appeal is concerned, the learned counsel for the assessee reiterated submissions as was made before CIT(A) while the learned O.R. relied on the order of the revenue authorities. We are of the view that the order of the CIT(A) on this aspect cannot be sustained. The ownership of the assets which were installed for the purpose of assessee's business and in connection with installation of which assets the civil work were carried out, did not vest with the assessee. The CIT(A) seems to have, got carried away ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. The expenditure was of a revenue nature akin to interest on funds borrowed for the purpose of business. The borrowing was in respect of an asset, which was to be taken on lease, and the ownership of which was never contemplated as that of the assessee. There is no ground to interfere with the orders of the CIT(A). 10. One of the reason assigned by the Assessing Officer for making the impugned disallowance was the treatment given by the assessee in respect of this item of expenditure as a deferred revenue expenditure in its books of account. 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 that is likely to accrue to it in the sense the advantage which was going to last for a few years beyond the previous year. When any expenditure is treated as a 'deferred revenue expenditure', it presupposes that the concerned expenditure, creating benefit is in the Revenue field and is a revenue expenditure but considering its enduring benefits as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing orders of the earlier years on the ground that investment allowance was not admissible on the foreign exchange fluctuations on notional basis. The Assessing Officer added back the amount to the income of the appellant, without appreciating that the same had never been debited to the profit and loss account. The CIT(A), however, did not deal with the issue and instead only issued directions to the Assessing Officer, to rectify the order to the extent of the addition of the aforesaid amount made in the figure of net profit since the same had not been debited to the profit and loss account by the appellant. Though similar issue had arisen for consideration in assessee's own case for assessment year 1990-91 in ITA No. 5772/Del./95 and this Tribunal had allowed the claim of the assessee, since the CIT(A) had not decided the issue, it would be proper to set aside the order of the CIT(A) on this issue and direct the CIT(A) to consider the issue afresh after affording assessee opportunity of being heard. Ground No.2 is treated as allowed for statistical purposes while ground No. 2.1 is dismissed as not arising out of the order of the CIT(A) at present. 14. The 3rd ground of appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incurred in connection with extension of his industrial undertaking or in connection with his setting up a new industrial unit. The order of the CIT(A) is therefore confirmed and this ground of appeal of the assessee is dismissed. 15. The 4th ground of appeal of the assessee reads as follows: "4. That the learned CIT(A), erred on facts and in law in confirming disallowance of Rs. 1,12,272 and Rs. 1,519 out of club subscription." 16. The assessee during the relevant previous year made payments to various clubs, the details of which are as follows: "(a) Membership subscription Rs. 1,12,272 (b) Corporate membership fee of Delhi Golf Club Rs. 1,519." The Assessing Officer disallowed the claim of the assessee for deduction of these expenses holding that they were non-business expenditure. On appeal by the assessee the CIT(A) held that the expenditure were personal expenses of directors and the directors entertained their personal friends and relatives and also business associates. If some expenditure incurred by the Director to entertain the clients or business associates at clubs is reimbursed by the company or met by the company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el expenses of directors. The Assessing Officer called for the details of foreign travel expenses. On scrutiny of the details filed in this regard, the Assessing Officer noticed that the foreign travel expenses also included expenditure in connection with foreign travel of Mrs. Santosh Munjal w/o Chairman Managing Director, Mr. Brij Mohanlal Munjal who had travelled with the CMD on 21-6-1995 to Mauritius and on 22-7-1995 to South Africa. The Assessing Officer thereafter called upon the assessee to show-cause as to why the portion of the expenditure relating to foreign travel of Mrs. Santosh Munjal be not disallowed as she was neither an employee of the assessee nor was her travel abroad necessary for the business of the assessee. In reply, the assessee stated that to strengthen the business relations and in order to promote exports the CMD had undertaken the foreign travel along with his wife and that it is a common business practice for the wife to accompany the directors/executive on such visits. The Assessing Officer however disallowed an expenditure of Rs. 4,84,134 being proportionate expenditure incurred on the foreign travel of Mrs. Santosh Munjal. On appeal by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 706 (Ker.) (b) CIT v. Sundaram Clayton Ltd. [1999] 105 Taxman 545 (Mad.) (c) ITO v. J.K. Synthetics Ltd. [1986] 18 ITD 490 (Delhi) (d) ITO v. F.F. Ferguson Co. [1986] 19 ITD 620 (Bom.) 22. In the present case, the visit to Mauritius at the invitation of the Confederation of Indian Industries, by the wife of the CMD along with the CMD was therefore to be considered as for business purpose and allowed as a deduction. The ground of appeal of the Revenue therefore deserves to be dismissed. As far as assessee's appeal regarding foreign travel expenses of wife of CMD to South Africa is concerned, the visit apparently is to participate in poojas carried out at South Africa. There is no reference to any meeting with any foreign business associates. There is nothing to suggest any business necessity for undertaking these visits. The visit of the various outlets in South Africa is claimed to be a goodwill visit. The explanation given in our view was not sufficient to conclude that the visit by the wife of the CMD was necessary and consequently to that extent the expenditure is liable to be disallowed. In our view the order of the CIT(A) is just and proper and calls for no inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was prohibited from disclosing these information, processes and inventions during the currency and also after termination of this agreement. That even during the currency of the agreement, the assessee was obliged to keep secret and confidential information furnished by the Japanese collaborator and that the assessee was also prohibited from sub-licensing the know-how to any third party. It was contended that payment for licence to use the know-how was a revenue expenditure and reliance was placed on the decisions of the Hon'ble Supreme Court in the case of CIT v. CIBA of India Ltd. [1968] 69 ITR 692, Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377. Further reliance was also placed on the decisions of the Hon'ble Delhi High Court in the case of Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746, Triveni Engg. Works Ltd. v. CIT [1982] 136 ITR 340, Addl. CIT v. Shama Engine Valves Ltd. [1982] 138 ITR 216, CIT v. Bhai Sunder Dass Sons (P.) Ltd. [1986] 158 ITR 115. It was further contended that insertion of the provisions of section 35AB allowed amortization of capital expenditure alone and that the said section makes a reference to acquisition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exclusive property of the licensor and shall be held in trust and confidence for licensor by licensee and that the licensee shall not divulge or communicate information to any other person, that the information obtained will be kept secret and confidential. Under clause 18.5 it is specifically agreed that the licensee shall claim no title or property right whatsoever during the existence of the agreement and if the agreement is terminated the licensee shall not claim any right, title, property, interest or use whatsoever at all times after the life of the agreement as regards the use of the intellectual property rights, know-how, technical information or other information received under the agreement. 27. The above terms clearly show that the assessee was merely entitled to use the know-how for manufacture of motor cycles and its parts. The law is settled that expenditure incurred on payment for use of technical know-how for a limited duration as opposed to payment for acquisition thereof is allowable as deduction under section 37(1) of the Act. The consideration paid for acquiring any know-how for the purpose of the business was held to be capital expenditure, not allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -sixth of the amount so paid shall be deducted in computing the profits and gains bf the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. (2) Where the know-how referred to in sub-section (1) is developed in a laboratory, university or institution referred to in sub-section (2B) of section 32A; one-third of the said lump sum consideration paid in the previous year by the assessee shall be deducted in computing in profits and gains of the business for that year, and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years. Explanation.- For the purposes of this section, 'know-how' means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto)." 29. To fall within the parameters of section 35AB, the assessee must have paid lump sum consideration for acquisition of any know-how for use for the purpose 'of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43 crores and Rs. 28 crores respectively from the total turnover, for the purpose of computing deduction under section 80HHC of the Act." 31. A decision on the 8th ground of appeal will also dispose ground No.7. The facts with regard to ground No.8 are as follows. The assessee was entitled to claim deduction under section 80HHC of the Act. While computing the deduction under section 80HHC of the Act the assessee had taken into consideration interest income of Rs. 1,64,78,854 as business income. This interest earned comprised of the following. Interest on intercorporate deposits, Loans advanced to employees and Bill Discounting Charges. According to the Assessing Officer such interest income was to be assessed under the head 'Income from other sources' and not 'Income from Business'. The Assessing Officer made a reference to the decision of the Hon'ble Supreme Court in the case of M/s. Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) in support of his conclusion wherein the Hon'ble Supreme Court has held that interest earned on short-term deposits will be treated as income from other sources. The assessee had during the relevant previous year availed re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Corpn. Ltd. [1995] 216 ITR 535 (Mad.). 33. As far as this plea of the assessee is concerned, the CIT(A) held that since the funds which were invested in ICDs were admittedly surplus funds which were lying idle, the earning of interest on such deployment of funds shall be considered as income from other sources. He also held that there was no business compulsion or business necessity for deployment of funds in ICDs. The CIT(A), therefore, considered the interest income earned on inter corporate deposit as income from other sources. With regard to the action of the Assessing Officer in not treating the Customs Duty benefit under Advance Licensing Scheme as part of business profits, it was contended by the assessee that the Duty Drawback as defined by the Customs and Central Excise Duties Drawback Rules, 1971 speak of rebate of duty chargeable on any imported material used in the manufacture of such goods and exported out of India. The assessee drew attention of the CIT(A) to the provisions of Advance Licensing Scheme notified by the Government and submitted that the Customs Duty benefit which the assessee gets under the Advance Licensing Scheme is akin to the Duty Drawback as def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Duty benefit received under the Advance Licensing Scheme, the Ld. Counsel relied on the decision of the Ahmedabad Bench of the Tribunal in the case of Asstt. CIT v. Pratibha Syntex Ltd. [1999] 63 TTJ (Ahd.) 409 wherein the Ahmedabad Bench of the ITAT while considering a case of claim under section 80HHC of the Act held that total benefit derived by an assessee on duty-free imports will form part of the profit by business under section 28(iiib) of the Act. The Tribunal found that under section 28(iiib) of the Act the expression 'used' was cash assistance received by an assessee by whatever name called and the expression 'whatever name' called was held to include any duty benefit derived by an assessee on dutyfree imports. On the basis of this decision it was submitted that the claim of the assessee should be considered under section 28(iiib) of the Act. With regard to the non-exclusion of the Excise Duty and Sales-tax, while computing the total turnover reliance was placed on the following decisions:- CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 (Born.), CIT v. Wolkem (P.) Ltd. [2003] 259 ITR 430 (Raj.), IFB Agro Industries Ltd. v. Dy. CIT [2002] 261 ITR (AT) 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 80HHC of the Act. In view of the above, the Excise Duty and Sales-tax is directed to be excluded from total turnover while computing deduction under section 80HHC of the Act. Ground No.8 is partly allowed. 37. In the result, the appeal filed by assessee is partly allowed. 38. Now we shall take up for consideration the appeal by the Revenue i.e., ITA No. 2906/De1./2000. The first ground of appeal of the Revenue reads as follows: "1. That on the facts and circumstances of the case, the learned CIT(A), has erred in allowing relief under section 80HH maintaining that the first year of manufacture of production is the first year of production of commercial manufacture though there is no distinction under section 80HH between commercial manufacturing or trial production." 39. The facts and circumstances giving rise to the aforesaid ground of appeal are as follows. The assessee was entitled to claim deduction under section 80HH of the IT Act. It claimed deduction under section 80HH of the IT Act of a sum of Rs. 7,07,83,477 in the present assessment year i.e. 1996-97. Under the provisions of section 80HH of the IT Act where the gross total in case of an assessee inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able as deduction not withstanding the fact that commercial production had not commenced. 40. Taking into consideration the findings of Tribunal for assessment year 1986-87, the Assessing Officer was of the view that the first year of production should be taken as having taken place in assessment year 1986-87 and therefore the period of 10 years referred to in section 80HH(4) ends with assessment ... year 1995-96 and therefore the assessee will not be entitled to deduction under section 80HH for the present assessment year viz., 1996-97. 41. According to the assessee the expression "beginning with the assessment year relevant to previous year in which the industrial undertaking begins to manufacture or produce articles" as used in section 80HH(4) refers to only manufacture of a final product and not manufacture of trial product. Since the final product was manufactured by the assessee only on 27-5-1985 the previous year relevant to assessment year 1987-88 the first year when deduction under section 80HH could be claimed is only assessment year 1987-88 and therefore the period of 10 years would end only with assessment year 1996-97, i.e., the assessment year in the present appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es commenced on 27-5-1985. According to the Assessing Officer the assessee did not choose to make a claim for deduction under section 80HH for assessment year 1986-87 because the assessee had incurred loss. Deduction under section 80HH would be available to an assessee even if trial production commenced and because there was a loss in assessment year 1986-87, the assessee did not claim deduction under section 80HH. The Assessing Officer also made a reference to the claim of the assessee for investment allowance as well as depreciation in assessment year 1986-87 and in his view this was sufficient to prove that production has started in the assessment year 1986-87 itself. 43. Aggrieved by the order of the Assessing Officer the assessee preferred appeal before the learned CIT(A). Before CIT(A), the assessee primarily contended that it was only when commercial production commenced the deduction under section 80HH can be claimed. The assessee relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Hindustan Antibiotics Ltd. [1974] 93 ITR 548 and the decision of the Hon'ble Madras High Court in the case of Addl. CIT v. Southern Structurals Ltd [1977] 110 ITR 164 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is in appeal before us. We have heard the rival submissions. The learned DR in his submissions reiterated the stand of the Assessing Officer. The learned counsel for the assessee again reiterated submissions as were made before the learned CIT(A). As can be seen from the ground of appeal of the revenue, what is challenged before us is not the finding of the learned CIT(A), that commercial production commenced only in previous year relevant to assessment year 1987-88 and that in the previous year relevant to assessment year 1986-87 only trial production had commenced. The only grievance of the revenue as projected in the ground of appeal is that first year of manufacture is not the first year of commercial manufacture or production since such a distinction is not contemplated by the provisions of the section 80HH of the IT Act. 45. The provisions of section 80HH insofar as it is relevant for a decision in the present case read as follows: "80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas. - (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st day of December, 1970, but before the 1st day of April, 1973, this sub-section shall have effect as if the reference to ten assessment years were a reference to ten assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1974." 46. In the case of CIT v. Hindustan Antibiotics Ltd [1974] 93 ITR 548, the question for consideration before the Hon'ble Bombay High Court arose in the context of section 15C of the Old Act, which reads as follows: "15C.(1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking computed in accordance with such rules as may be made in this behalf by the Central Board of revenue. (2) This section applies to any industrial undertaking which- (i) is not formed by the splitting up, or the reconstruction of business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on or before the 1st day of April, 1948; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s certainly in the accounting year 1954-55, as the balance-sheet and profit and loss accounts for the year ending March 31, 1955, showed that a substantial quantity of raw materials and stores were consumed, wages were paid and electricity charges were incurred. In the appeal by the assessee, the Appellate Assistant Commissioner reversed the order of the Income-tax Officer and held that the assessee-company was entitled to exemption under section 15C of the Act for the assessment year 1960-61 also. On a further appeal by the revenue before the Tribunal, it was held that regular production of the end product commenced only in August, 1956, relevant to the assessment year 1956-57 and that mere production of crude penicillin, which until a final certificate as to quality was received may not be regarded as of any use, and cannot be regarded as the beginning of the manufacture or production of the article. On further appeal by the revenue, the Hon'ble Bombay High Court held as follows: "The question that arises for consideration in this case depends upon the correct interpretation of the expression 'has begun or begins to manufacture or produce articles' used in section 15C(2)(ii). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losing stock of crude penicillin at the end of March, 1955, but even the assessee-company itself did not know whether the crude penicillin manufactured or produced by it would at all be useful to them for the production, or manufacture of sterile penicillin which is only a saleable product in the market. Facilities for testing crude penicillin are not available in this country and samples were required to be sent to U.S.A and U.K. with a view to find out its quality. It was only in the month of June, 1955, that a certificate as to the quality of the crude penicillin was received by the assessee company and regular production was thereafter commenced only from and after August, 1955. If, on testing, the crude penicillin, which was sent for a certificate, was found useless it will be difficult to take the view that the assessee-company has begun to manufacture or produce articles, meaning thereby, articles which will ultimately be useful for manufacturing or producing finished products with the object of selling for which the assessee-company was incorporated. In our view, if regard be had to the object with which the section was enacted, then the word 'articles' in section 15C(2)(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible for the relief for the assessment year 1964-65 as the assessee could not be said to have begun manufacturing or producing railway wagons in any commercial sense in the calendar year 1958 relevant for the assessment year 1959-60. On further appeal by the Revenue the Court held as follows: "There can be no dispute about the fact that the article that is relevant in the context of the present case is the wagon as such. Production of a proto-type is not production of an article as such, because if the Ministry of Railways had rejected the proto-type or had suggested substantial modifications thereto, then it would not have been possible for the assessee to go into production of the wagons in accordance with the prototype already produced and the process of manufacture in accordance with the rectified type of wagon would take some further time. Therefore, the mere manufacture of proto-type would not be enough to show that the assessee had begun to manufacture or produce articles. The manufacture or production of articles must be in some commercial sense." 48. The principles laid down in the aforesaid decisions squarely apply to the provisions of section 80HH and therefore t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the finding that commercial production commenced in the case of the assessee only in the assessment year 1987-88, the claim for deduction under section 80HH in assessment year 1996-97 was to be allowed. 50. The following facts would go to show that only the trial production had started on 16-3-1985 during the previous year relevant to the assessment year 1986-87. The commercial production began only on 27-5-1985, falling the assessment year 198788. The Director's Report to the shareholders and notes to accounts forming part of the annual report for the financial year 1984-85 would go to show that the commercial production of Motor Cycles commenced only on 27-5-1985. A copy of the annual report for the year ending is placed at page Nos. 368 to 370 of the assessee's paper book. At page 359, is the Director's report to the shareholders wherein the above fact has been informed by the Directors to the shareholders. In the notes to the accounts to the said annual report there is a reference to raw materials and components consumed during the trial production as per note No.4 of the notes to the accounts in the note Nos. 10 to 12 of the notes to the accounts the fact that the trial prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Motor Cycle. The warranty so provided was for the following period,- (a) On components of CD 100 series of Motor Cycles - 6 months (b) On frame of Splendor model of Motor Cycles - 6 months (c) On Engine components of Splendor model-6 months The assessee had claimed a sum of Rs. 28,70,416 as deduction on account of provisions of warranty, the assessee during the relevant previous year changed its method of accounting for warranty from cash to mercantile system. According to assessee this change in method of accounting became necessary in view of the amendments to provisions of section 209(3) of the Companies Act, 1956 whereby the assessee was required to follow the accrual system of accounting. The assessee also made a reference to the opinion of the Institute of Chartered Accountants of India, whereby, they have opined that it was mandatory to provide warranty cost on accrual basis. According to the assessee, the change in method of accounting and the provisions made was based on the number of Motor Cycles sold in the particular year and the actual claims on Motor Cycles sold in the past. The provision was made on the basis of weighted average of the actual claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounting followed by the assessee was more scientific and based on actual claims for a specific period and that the Assessing Officer has not established that a better method would have been followed by the assessee. 53. The learned CIT(A), on consideration of the submission of the assessee, was of the view that the assessee was following the cash system of accounting in respect of the claim for warranties which was logical and realistic in determining the correct income. But such system of accounting could not be followed by the assessee, since as per the Companies Act, the assessee was statutorily required to follow mercantile system of accounting. He also was of the view, that even the hybrid system of accounting could not be followed by the assessee, because the law requires an assessee to either follow cash system of accounting or mercantile system of accounting. The learned CIT(A), thereafter considered the system of determining the provisions warranties as adopted by the assessee and was of the view that the provision is made by the assessee every year and the actual expenses incurred every year has also been debited in the profit and loss account. A similar provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 present 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." Similarly, in the case of Commissioner of England Revenue v. Mitshubishi Motors, New Zealand 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 deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. The expenses actually incurred for the previous year and provided for is not less than the actual expenses. Since the method of accounting is scientific and results in correct determination of profits. We are of the view, that the order of the learned CIT(A), is just and proper and does not call for any interference and the same is therefore, confirmed. Hence, this ground of appeal of the revenue is dismissed. 57. The third ground of appeal has already been decided while deciding the first ground of appeal of the assessee for the reasons stated therein. Hence, this ground of the appeal of the revenue is dismissed. 58. The fourth ground of the appeal of the revenue reads as follows: "4. That on the facts and in the circumstances of the case, the learned CIT(A), has erred in deleting the disallowance as to presentation of articles without considering the facts that the presentation of articles without considering the facts that the presentation articles are not in the nature of advertisement." 59. During the previous year, the assessee had incurred an expenditure of Rs. 25,93,750 on presentation of articles. Out of this amount, a sum of Rs. 21,93,750 was spent on refriger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A): Dy. CIT v. Bhagwandas Shobalal Jain [1997] 60 ITD 118 (Jab.) Panama Industries Laboratories v. IAC [1991] 38 ITD 80 (Born.) Asstt. CIT v. Hindustan Marketing Advertising Co. Ltd. [1994] 49 TTJ (Delhi) 96 Avon Cycles Ltd. v. Asstt. CIT [1997] 59 TTJ (Chd.) 75 Aristocrat Marketing Ltd. v. Asstt. CIT [1996] 85 Taxman 236 (Born.) (Mag.) This ground of the revenue is therefore, dismissed. 61. The 5th ground of the revenue reads as follows:- "5. That on the facts and in the circumstances of the case, the learned CIT(A), has erred in allowing relief of Rs. 1,34,191 in respect of R D expenditure." 62. The assessee during the relevant previous year, incurred capital expenditure amounting to Rs. 79,12,181 on research and development and claimed the same as business expenditure under section 35(1)(iv) of the Act. The Assessing Officer, however, disallowed a part of the expenditure amounting to Rs. 1,34,191 on the basis that the same has not actually been paid during the year. The amount of Rs. 1,34,191 disallowed by the Assessing Officer had been paid in advance by the assessee to the extent of Rs. 1,23,691 during the financial year 1994-95, the balance amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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