TMI Blog2002 (5) TMI 221X X X X Extracts X X X X X X X X Extracts X X X X ..... at the order under s. 250/143(3) dt. 9th May, 1995, of the CIT(A) is bad in law and needs to be quashed. Besides the above, the learned authorised representative also prays for allowing the following additional ground filed on 15th March, 1999, for consideration of the Tribunal while deciding the present appeal: "That, on the facts and in the circumstances of the case, the appellant should be held entitled to deduction of Rs. 1,05,75,000 on account of actual payment of funded interest." 3. The learned authorised representative submits that the financial institutions had agreed to fund the overdue interest upto 31st March, 1989 aggregating to Rs. 2,89,67,325 in the term loan on 25th Oct., 1989, and in the return for 1989-90 the assessee had claimed deduction under s. 43B of the Act for the entire funded interest on the ground that as a result of the aforesaid sanction of the financial institutions, the entire funded interest got converted into loan and was, therefore, paid in terms of the said sanction. 3.1 The lower authorities denied the claim. The Tribunal vide order dt. 31st Aug., 1998, confirmed the action of the lower authorities on the ground that (i) there was no act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd (P) Ltd. (1969) 74 ITR 254 (Guj) He submits further that no such claim was raised by the assessee before the lower authorities and the assessee indirectly seeks direction from the Tribunal for other years. He also refers contents of pp. 7759 and 7766 of the book Law of Income tax authored by Chaturvedi Pithisaria. The learned senior Departmental Representative also points out that on this issue reference application under s. 256(1) of the Act in RA No. 177/Ind/98 is pending disposal before the Hon ble High Court for the asst. yr. 1989-90. He submits further that the assessee had sufficient opportunity to raise the additional ground before the lower authorities as the assessment order was passed on 31st March, 1993, and the first appellate order has been passed on 9th May, 1995. He submits that the additional ground should not be allowed to be raised. He cites the decision of the Hon ble Supreme Court (Allahabad High Court) in the case of Cawnpore Chemical Works (P) Ltd. vs. CIT (1992) 105 CTR (All) 199 : (1992) 197 ITR 296 (All). 3.4 The learned authorised representative rejoins the reply with the submission that the facts on record have been defined by the Hon ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orised representative is that present additional ground of appeal has arisen pursuant to the order of the Tribunal holding that the deduction under s. 43B of the Act in respect of the funded interest was not admissible for the asst. yr. 1989-90 and the assessee is now seeking to claim deduction for the instalment of funded interest (term loan) paid during the relevant previous year and upto the date of filing the return of income. 3.6 After consideration of the arguments of both the parties, we find force in the submission of the learned authorised representative as the proposed additional ground has arisen due to fulfilment of aforesaid two requirements during the year relevant for the assessment year under consideration, for adjudication of which no fresh material is required since there is no dispute on the facts but the dispute is as to whether the assessee under the present facts and circumstances is entitled to have deduction for the funded interest under s. 43B of the Act, a pure question of law. We also find support from the decision of the Hon ble Supreme Court in the case of Jute Corporation of India Ltd. vs. CIT Anr. wherein it was held that it is the discretion of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -matter of the appeal and in the guise of raising additional grounds on new item or subject-matter cannot be allowed to be introduced under r. 11, Several other judgments have also been cited by the learned Senior Departmental Representative but after going through these we do not find that these are helpful to the Department having different facts. 3.7 We thus allow the additional ground raised by the assessee for our consideration and adjudication and in view of the fulfilment of requirements by the assessee during the year relevant for the assessment year under consideration as the financial institutions had agreed to fund the overdue interest upto 31st March, 1989, aggregating to Rs. 2,89,67,325 into term-loan on 25th Oct., 1989, and as a result of the sanction of the financial institutions, the entire funded interest was converted into loan, the assessee is very much entitled to deduction of Rs. 1,05,75,000 on account of actual payment of funded interest in terms of s. 43B of the Act. This ground is accordingly allowed with the direction to the AO to accept the claim of the assessee in this regard. Our finding on this additional ground is, however, subject to the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions and (d) license to use patent and trade marks of MMC in connection with sale of licenced products. Vide this agreement MMC also made available to the assessee use of drawing, design, etc. for manufacture of the licenced products for the duration of the agreement in lieu of which the assessee had to pay lumpsum know-how fee of Rs. 330 million Japanes yen and royalty at 3 per cent of MMC FOB Japanese Port Prices for local parts corresponding to those manufactured by the assessee. The learned authorised representative submits further that where the expenditure is on obtaining access to technical knowledge of the collaborator for a limited duration, the expenditure is of revenue in nature. Where the payment is made for mere right to use, the expenditure is termed to be on revenue account, whereas in case of out-right purchase of know-how, the payment secured transfer of technical know-how in favour of the purchaser, the expenditure is termed as to be capital in nature. The learned authorised representative cites the following decisions: 1. CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC) 2. Shriram Refrigeration vs. CIT (1981) 127 ITR 746 (Del) 3. Triveni Engineers Works v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Supreme Court in the case of Charanjit Lal vs. Union of India AIR 1951 SC 41 and in the case of Devidas Gopal Krishna vs. State of Punjab AIR 1967 SC 1895 wherein the term acquisition has been defined. He draws our attention to p. 144 of the paper book wherein several decisions of the Tribunal have been referred to with stress to the Third Member decision of the Tribunal in the case of Goodyear India Ltd. vs. ITO (2000) 68 TTJ (Del)(TM) 300 : (2000) 73 ITD 189 (Del)(TM) and submits that the amount paid was revenue expenditure under s. 37(1) and the provisions of s. 35AB of the Act have no application as the assessee had only obtained a limited right to draw only technical knowledge of the collaborator during the currency of agreement, the expenditure incurred was not for acquisition of know-how. He also refers the decision of Madras Bench of the Tribunal in the case of M. Subramaniam vs. Dy. CIT (1992) 42 ITD 676 (Mad) wherein under similar facts and on identical issue, the amount was held allowable in full as revenue expenditure under s. 37(1) of the Act. The learned authorised representative further submits that the mere right to sub-licence vested in the assessee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has claimed it as revenue in nature being a licensee. He again refers para 10 p. 21, para 13 p. 22, para 3 p. 23, para 6 p. 24, para 3 cl. 7, p. 2 i.e., amended agreement-I placed at pp. 29 to 33 of the paper book, para 6, cl. 6 of p. 4 of the said amended agreement i.e., p. 32 of the paper book and submits that the agreement was actually for installation of plant and machinery. He also refers para 3 pp. 9 and 10 of the assessment order as well as p. 12 of the first appellate order. The learned senior Departmental Representative cites the following decisions: 1. M.K. Bros. (P) Ltd. vs. CIT 1972 CTR (SC) 357 : (1972) 86 ITR 38 (SC) 2. Travencore Sugars Chemicals Ltd. vs. CIT (1966) 62 ITR 566 (SC) 3. CIT vs. Jalan Trading Co-op. Ltd. (1985) 47 CTR (SC) 182 : (1985) 155 ITR 536 (SC) 4. Jonas Woodhead Sons (India) Ltd. vs. CIT (1997) 138 CTR (SC) 275 : (1997) 224 ITR 342 (SC) 5. CIT vs. Shriram Bearing Ltd. (2001) 170 CTR (Cal) 142 : (2001) 251 ITR 155 (Cal) 6. CIT vs. Panipat Woolen General Mills Co. Ltd. 1976 CTR (SC) 317 : (1976) 103 ITR 66 (SC) He submits further that the object of the payment and not the manner of the payment is to be seen while arriving at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the order impugned and the decisions quoted by them. The Department has disallowed the deduction on the basis that the payment of royalty was for acquisition of patents and copyrights; hence the same was capital expenditure and eligible for patents amortisation under s. 35A of the Act. From a thorough reading of the terms of the agreement dt. 4th Oct., 1982, between MMC and the assessee, we find force in the submission of the learned authorised representative that the expenditure in question was on obtaining access to technical knowledge of the collaborator for a limited duration and the payment was made as a licensee for obtaining the right to use the know-how and it was not a case of outright purchase of the know-how. We also agree with the plea of the learned authorised representative that there is distinction between the acquisition/purchase of know-how and use of know-how and where transferor retains property rights in the design, secret formula, etc. and allow the use of such right, the same is in the nature of royalty whereas in an outright sale or purchase, the consideration is for transfer of such rights and cannot be termed as royalty. The assessee having power to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure incurred for getting know-how was allowable as revenue expenditure under s. 37(1) of the IT Act. 4.6 We thus decide the issue involved in ground No. (i) in favour of the assessee. Ground No. (i) is, accordingly, allowed. 5.1 Ground No. (ii) relates to the disallowance to the extent of Rs. 55,569 out of the interest paid. The facts in brief are that the assessee had advanced loan of Rs. 250 lacs to its sister-concern, Eicher Tractor Ltd. (in short ETL ) on various dates carrying interest @ 15.5 per cent per annum. The AO alleged that the assessee had diverted interest-bearing loan to its associate companies at lower rate of interest i.e., 15.5 per cent instead of 18 per cent per annum and he added differential interest amounting to Rs. 6,25,000 to the income of the assessee, The learned CIT(A) restricted the disallowance of interest to Rs. 55,569 taking the average rate of interest 16.5 per cent per annum on which funds were available to the assessee and directed that the interest to be calculated for the number of days the loan was advanced. Against this first appellate order, the assessee is in appeal before us. 5.2 The learned authorised representative inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rued @ 15.5 per cent per annum. 5.3 Concluding his arguments, the learned authorised representative further submits that the Department is not in appeal against the relief allowed by the learned CIT(A). 5.4 The learned senior Departmental Representative, on the contrary, justifies the first appellate order and cites the following decisions: (i) East India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC) (ii) CIT vs. Metro General Finance Ltd. (2002) 173 CTR (Del) 123 5.5 We, after considering the arguments advanced by the parties, in view of the material available on record and after having gone through the order impugned as well as the decisions relied upon by the parties, find force in the submissions of the learned authorised representative that the Department has failed to establish nexus between the borrowed funds taken by the assessee and the amount advanced to ETL especially when there are sufficient funds available with the assessee. We thus restrict the addition to Rs. 5,248, considering that the assessee itself had offered Rs. 50,321 for tax being interest accrued @ 15.5 per cent per annum. The ground is accordingly allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned authorised representative rejoins with the submission that specific date was there, it is not an ad hoc provision and the assessee had option to write off or to make provision. He submits that the provisions of s. 115J of the Act should be construed strictly. 5.11 After considering the arguments advanced by the parties as well as the decisions relied upon by them and the order impugned, we find substance in the submissions of the learned authorised representative and, accordingly, allow the ground in favour of the assessee with the direction to the AO to accept the claim of bad debt of the assessee. 5.12 So far as the addition of Rs. 2,67,011 towards provision for gratuity to the profits of the assessee-company in the book profit under s. 115J of the Act is concerned, the learned authorised representative submits that the provision for gratuity was determined by the assessee on the basis of actual valuation which is an ascertained liability. This provision was a necessary change to the P L a/c and not an appropriation. He submits further that the Hon ble Supreme Court in the case of Metal Box Co. of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC) held that the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uant to the agreements entered into with EGL. The AO disallowed 50 per cent of the service charges i.e., Rs. 27,50,000 invoking the provisions of s. 40A(2)(b) of the Act as being excessive and unreasonable having regard to the legitimate needs of the assessee which has been deleted by the learned CIT(A). 6.2 The learned senior Departmental Representative justifies the assessment order in this regard. He submits that the onus is on the assessee to establish the claim and there are two agreements but there is no clarity in the terms of the agreement. He refers page Nos. 13, 14 and 36 to 38 of the paper book filed by the assessee. He also refers page Nos. 6 and 8 of the annual report 1991-92 and page Nos. 7 and 8 of the annual report 1990-91 and submits that a large number of components were indigeneous and there were technical absorption, adoption and innovation. He draws our attention to the contents of paras 5 and 7 of the first appellate order and submits that only broad details are referred instead of specific details nor has the assessee given details of the specific services to justify the business of the assessee. He refers the contents of page Nos. 2134 and 2125 of the book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is no allegation by the Revenue for diversion of income. The AO is questioning only the quantum of services and genuineness of services have not been doubted. He refers decision of the Hon ble Supreme Court in the case of Radhasoami Satsang vs. CIT and submits that consistency in the approach of the Department under similar facts must be maintained. He submits further that the decisions of the Hon ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. vs. CIT, Lachminarayan Madan Lal vs. CIT relied on by the learned Departmental Representative are not on the issue and, therefore, are not applicable to the present case. The learned authorised representative while concluding his arguments submits further that it is not the jurisdiction of the AO to interfere with the quantum of expenditure incurred on the services. 6.5 We have considered the arguments in view of the material available on record and have also gone through the order impugned as well as the decisions relied on by the learned authorised representative at pp. 128 and 129 of the paper book. We find substance in the submissions of the learned authorised representative. The learned CIT(A) has deleted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s plant and retained by the assessee pending finalisation of certain issues. The party was insisting upon the payment of such amount as evident from the copy of letter dt. 29th Jan., 1993 and 13th May, 1993, produced before the lower authorities and thus, the amount was neither waived off by the party nor written back unilaterally by the assessee. So far as the amount of Rs. 2,79,552 due to Jay Coach, the learned authorised representative submits that certain bus bodies were supplied by the party in the year 1987, and the amount was outstanding in respect of this invoice only. Since this amount was payable and has not been waived off by the party, the provisions of s. 41(1) of the Act are not applicable. He submits further that to apply the provisions of s. 41(1) of the Act, the liability must have finally ceased and there must be no chance of revival of the liability in future as held by the Hon ble Allahabad High Court in the case of J.K. Synthetics Ltd. vs. ITO Anr. 1975 CTR (All) 256 : (1976) 105 ITR 864 (All) and affirmed by the Hon ble Supreme Court in Union of India vs. J.K. Synthetics Ltd.. He also refers the following decisions: 1. Chief CIT vs. Kesaria Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w ss. 40 and 40A of the Act. The assessee had claimed expenditure by way of rent, repairs and depreciation on guest house allowable under ss. 30, 31 and 32, respectively, were not disallowable under s. 37(4) of the Act, submits the learned authorised representative. 8.4 We have considered the arguments advanced by the parties in view of the material available on record and have also gone through the decisions relied upon by the parties as well as the order impugned herein. The CIT(A) had allowed the claim accepting the contention of the assessee in this regard following the decision of the Hon ble Bombay High Court in the case of CIT vs. Chase Bright Steel Ltd. (1989) 75 CTR (Bom) 60 : (1989) 177 ITR 124 (Bom), decision of the Delhi Bench of the Tribunal in Eicher Good Earth Ltd., Bombay Bench of the Tribunal in American Bureau of Shipping vs. ITO (1986) 19 ITD 793 (Bom) and of the Hon ble Bombay High Court in the case of Century Spinning Mfg. Co. Ltd. vs. CIT (1991) 99 CTR (Bom) 8 : (1991) 189 ITR 660 (Bom). The decision of the jurisdictional High Court relied on by the learned senior Departmental Representative is, however, latest amongst the above. We, therefore, respectfull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign company. 10.2 Besides the above, an additional ground that the learned CIT(A) has erred in deleting the addition of Rs. 1,74,340 made by the AO in respect of guest house expenses has been raised. 10.3 After hearing both the parties, we are of the view that there is no need to consider fresh material for disposal of the additional ground. We, therefore, allow this additional ground for our consideration and adjudication at this stage. The learned senior Departmental Representative adopts the same arguments advanced by him on identical issue raised in the asst. yr. 1990-91 whereas the learned authorised representative also adopting the same arguments advanced by him submits further that the additional ground raised herein is not properly worded. 10.4 We have already considered and adjudicated this issue in the Departmental appeal for the asst. yr. 1990-91. Following the view taken therein, we allow this additional ground in favour of the Department. 10.5 Ground No. (i): The issue raised in ground No. (i) has been considered by us in the Departmental appeal for the asst. yr. 1990-91. Following the view taken therein, we decide the issue in favour of the assessee, reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the order of the Tribunal for the asst. yr. 1989-90 in the case of the assessee and submits that there is no contingent liability. He submits further that the assessee has been following consistent method of accounting and unless there is loss to the Revenue, the same should not be disturbed. He refers the following decisions: (i) Bharat Earth Movers vs. CIT; and (ii) CIT vs. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom) 10.8 The learned authorised representative also banks upon the first appellate order. 10.9 The learned senior Departmental Representative rejoins with the submission that the provisions of s. 43A may come in operation only if liability still remains. He puts further stress on the decision of the Hon ble Supreme Court in the case of CIT vs. Arvind Mills Ltd. 10.10 We have considered the arguments advanced by the parties in view of the material available on record and have gone through the order impugned as well as the judgments relied on by them. So far as the decision of the Tribunal in the asst. yr. 1989-90, in the case of the assessee is concerned, the appeal was preferred against the order of the learned CIT under s. 263 and the appeal was allowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the assessment order in this regard whereas the learned authorised representative cites the following decisions opposing the aforesaid ground: (i) Kamal Textiles vs. ITO (1991) 95 CTR (MP) 274 : (1991) 189 ITR 339 (MP) (ii) Otis Elevator Co. (India) Ltd. vs. CIT and refers CBDT Circular No. 689 dt. 24th Aug., 1994 11.3 We have gone through the order impugned in view of the arguments advanced by the parties. The assessee had opposed the addition made in s. 143(1)(a) proceedings. The learned CIT(A) has dealt with the issue in detail in para Nos. 5 and 6 of its order which is comprehensive and reasoned one and need no interference. 11.4 In the result, the appeal is rejected. 12.1 ITA No. 772/Ind/95 (Asst. yr. 1992-93): The assessee has questioned the first appellate order on the following grounds that the learned CIT(A) has erred in: (i) confirming the disallowance of Rs. 1,72,27,000 out of royalty paid to M/s Mitsubishi Motors Corporation, Japan. (ii) confirming the disallowance of Rs. 15,20,852 on account of exchange loss incurred in relation to the raw materials and components in transit. (iii) confirming the disallowance of Rs. 7,21,000 on account of exchange lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the additional liability on account of exchange fluctuation relating to circulating capital has been allowed as deduction in the following cases: (i) CIT vs. V.S. Dempo Co. (P) Ltd. (1993) 115 CTR (Bom) 163 : (1994) 206 ITR 291 (Bom) (ii) CIT vs. Bank of India (1997) 137 CTR (Bom) 323 : (1996) 218 ITR 371 (Bom) (iii) CIT vs. Bharat Heavy Electricals Ltd. (1999) 156 CTR (Del) 12 : (1999) 239 ITR 756 (Del) and (iv) Telemecanique Controls (India) Ltd. vs. Dy. CIT (1998) 60 TTJ (Del) 434 : (1991) 60 ITD 483 (Del) The learned authorised representative while concluding his arguments also draws our attention to the contents of p. 76 of the paper book of the assessee i.e., details of difference in foreign exchange rate on account of raw material and components during the asst. yr. 1992-93. 12.5 The learned senior Departmental Representative, on the other hand, banks upon the orders of the authorities below. 12.6 We have considered the arguments advanced by the parties and have gone through the order impugned as well as the decisions relied on by the learned authorised representative and the Department. The Hon ble Delhi High Court in the case of CIT vs. Bharat Heavy Elec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CTR (Bom) 497 : (1995) 213 ITR 106 (Bom). 13.2 The learned authorised representative submits that the liability arising on account of exchange rate fluctuation arose only at the time of actual remittance of royalty during the relevant previous year and the same could not have been anticipated or provided at an earlier point of time. He submits further that although the liability pertains to the liability payable for the earlier year, the same crystallised/became known only at the time of remittance of the same during the relevant previous year and such additional liability is clearly allowable in the year the liability became known for the first time as held by the Hon ble Gujarat High Court in the case of Saurashtra Cement Chemical Ind. Ltd. vs. CIT (1994) 122 CTR (Guj) 329 : (1995) 213 ITR 523 (Guj) and by the Hon ble Calcutta High Court in the case of S.P. Jaiswal Estates (P) Ltd. vs. CIT (1996) 130 CTR (Cal) 338 : (1995) 216 ITR 145 (Cal). He submits further that the decisions relied on by the learned CIT(A) have no application to the facts of the present case as therein in the case of Shri Sajjan Mills Ltd. it was held by the Hon ble Supreme Court that the amount of liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the first appellate order on the following grounds that on the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting : (i) the addition of Rs. 1,12,50,000 made by the AO under s. 40A(2)(b) on account of disallowance being 3/4th of service charges paid to EGL as assessee company failed to produce supporting evidence and bills etc. as well. (ii) the disallowance of Rs. 11,63,000 out of depreciation in respect of increased cost of P M by Rs. 46,56,000 due to fluctuation in exchange rate of foreign currency even though the assessee did not remit the amount of the increased cost. (iii) the disallowance of Rs. 18,82,000 under the head stores and tools consumed holding that the same was not in the nature of capital expenditure even though the assessee itself had claimed such expenses as capital expenditure in earlier years. 17.2 Grounds Nos. (i) and (ii): The issues raised in these grounds have already been adjudicated by us in favour of the assessee after considering the arguments advanced by the parties in the appeal for the asst. yr. 1990-91. Following the reasons given therein, we decide these grounds in favour of the assessee Ground No. (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Saraswati Industrial Syndicate Ltd. vs. CIT (1981) 25 CTR (P H) 105 : (1982) 137 ITR 886 (P H) wherein, he submits, the Hon ble Court applying the ratio of the decision in the case of Empire Jute Company Ltd. vs. CIT held that the tools and implements, laboratory equipments, etc. were purchased to carry on the assessee s business more efficiently and profitably and, hence, the expenditure thereon was a revenue expenditure. He draws our attention to the contents of page Nos. 99 to 103 of the paper book filed by the assessee i.e., submissions of the assessee before the CIT(A). 17.5 We have considered the arguments advanced by the parties in view of the materials available on record and have also gone through the order impugned as well as the decisions cited by the learned authorised representative. The learned CIT(A) has dealt with the issue in paras Nos. 9 to 11 of its order in detail. In para 11 he has come to the conclusion that since the claims were allowed in the asst. yrs. 1990-91 and 1991-92 without making any disallowance under this head, there is no justification to take a divergent view on identical facts particularly under the circumstances that the cases S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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