9911796707
TMI Blog2003 (3) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... istered firm engaged in the business of construction of various types of R.C Tall structures, such as Natural Draught Cooling Towers, Storage Silos, Chimney stacks and similar structures and other structural engineering. The business is being carried on for a number of years. The construction of Tall structures like Chimney stacks and Cooling Towers require scaffolding for the purpose of construction. When these Tall structures are constructed, a big scaffolding is required to be erected with the help of which high rise construction is being carried out. The assessee-firm entered into foreign collaboration with an English firm called Bierrum & Partners Ltd. by an agreement dated 18-8-1988. The foreign. collaborator, shortly referred as Bierrum, had developed advanced methods of construction techniques and systems. They had particularly developed and got patented a system called 'Bierrum System' which contains latest technical know-how for construction systems and techniques suitable for Tall RC structures such as Draught Cooling Towers for electricity power stations, Chimney stacks, storage silos and other structures. A copy of the Agreement has been placed on record at pages 10 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and terms of payment. There are two types of payments envisaged in the Agreement. Clause 5.1 refers to lump-sum amount of £ 30,000 subject to tax as per Indian laws in four instalments; the first instalment of 32.5 per cent within 30 days from the effective date, 32.5 per cent within 30 days from Bierrums transferring, delivering and imparting to the assessee Bierrums System and Bierrum know-how. 30 per cent within 30 days after commencement of use of Bierrums Systems and balance 5 per cent within 30 days on successful completion of first Natural Draught Cooling Tower shell and removal of the construction system. (This lump-sum payment is subject-matter of dispute in assessment year 1989-90 in the assessee's appeal and in assessment year 1990-91 in department's appeal). As per clause 5.2, in addition to lump-sum payment the assessee is required to pay for engineering service £ 30,000 for the first Natural Draught Cooling Tower shell. Out of the above, 20 per cent is payable within 30 days of the commencement of construction, 40 per cent within 30 days of completion of 50 per cent work of tower shell and 40 per cent within 30 days of completion of tower shell for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re on account of technical know-how fees. According to this section, the amounts spent under the Head has to be allowed in six equal instalments starting from the year in which it was incurred. In response to the Assessing Officer's intention to disallow 5/6th of the amount claimed, it was claimed by the assessee's representative that section 35AB was not applicable in the assessee's case. According to the assessee, it was a civil contractor and not manufacturer of any article or thing. The know-how was being used for reducing the cost of construction of Cooling Towers and provisions of section 35AB had no application. This contention of the assessee was, however, turned down by the Assessing Officer by holding that earlier to the introduction of the section, there was a dispute between the assessee and the Department as to whether such expenses are capital or revenue. There being considerable conflict of opinion, section 35AB was introduced w.e.f. 1-4-1986 and it is under section 35AB that all technical know-how fee are governed. He further held that in the context of industrial company, the definition of the term as per Finance Act, 1984, manufacture or processing of goods is tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made available under the contract was one which would help the assessee in carrying out its business efficiently. The System so made available had a limited life and consideration of Rs. 2,82,307 can be treated as revenue expenses. He further held that in the age of advancement of scientific knowledge there is no permanence of systems and hence disallowance of lump-sum consideration of Rs. 2,82,307 was not correct. According to him, the Assessing Officer had allowed only 1/6th of the expenses, but he held that the entire amount of Rs. 2,82,307 was allowable as revenue expenditure and, therefore, addition of Rs. 2,35,247 was deleted. 10. It will be seen from the above that in regard to the lump-sum payment, the ld. CIT(A) came to diametrically opposite conclusion probably because of subsequent pronouncement by the Supreme Court in the case of N.C. Budhiraja & Co. that the expression manufacture or processing will not include construction activity. This finding of the ld. CIT(A) in the assessment year 1990-91 is challenged by the Revenue in its appeal. 11. In the assessment year 1990-91, there was an additional point regarding payment of Rs. 8,19,640 paid by the assessee towards En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of CIT v. Kirloskar Cummins Ltd. [1995] 202 ITR 36 as also another decision of the Bombay High Court in the case of CIT v. Tata Engineering & Locomotive Co. (P.) Ltd. [1980] 123 ITR 538. The CIT(A), however, held that the facts in the assessee's case are distinguishable from those in both the above decisions of the Bombay High Court. He, therefore, held that the addition of Rs. 8,19,364 had been properly made. It is against this disallowance confirmed by the CIT(A) that the assessee is in appeal for the assessment year 1990-91. 13. The issue regarding deduction on account of lump-sum payment involved in the assessment years 1989-90 and 1990-91 and deduction of engineering fees for the assessment year 1990-91 arise from the same technical know-how agreement. According to Shri K.A. Sathe, the learned counsel for the assessee, same considerations apply in regard to the allowability of the expenditure and the ld. CIT(A) was not justified in taking conflicting stands on the same issue in two different years. He further stated that the CIT(A)'s finding in regard to allowability of lump sum payment as revenue expenditure that section 35AB did not apply to the facts of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture was a matter of dispute and the Department was contending that such capital expenditure would not be eligible for the purpose of depreciation. According to the learned counsel, it is really to resolve this controversy that section 35AB has been introduced providing amortization of the expenditure incurred for acquiring technical know-how. According to Shri Sathe, the expression lump-sum payment for acquiring know-how is important and suggests that the question should be in the nature of capital expenditure. If, on the other hand, technical know-how is obtained for its use in existing business, such a payment would not be for acquiring know-how and would be outside the purview of section 35AB. Thus, according to Shri Sathe, expenditure incurred in relation to technical know-how will have to be considered as revenue or capital on the basis of the terms of the agreement and on the basis of voluminous case law on the point and section 35AB cannot be conclusive of the matter. 15. Shri Sathe specifically mentioned that in the assessee's case in particular section 35AB had no application, because the said section refers to know-how required for the purpose of assisting manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g controversy between the assessees and the Department whether such expenditure in acquiring know-how was capital or revenue. According to the ld. D.R. there is no scope for holding that section 35AB has only limited application in cases where the assessee had acquired know-how and the expenditure is considered as capital as contended by Shri Sathe. According to him, the question whether the expenditure involved is revenue or capital cannot be decided as per the whims of the assessee and there is no scope for any interpretation of section 35AB as has been sought to be done by the assessee's representative. He, however, di4"not specifically deal with the finding of the ld. CIT(A) that provisions of section 35AB were not applicable in view of the fact that the assessee was not engaged in the business of manufacturing of goods. The finding of the CIT(A) was based on the decision of the Supreme Court in the case of N.C. Budhiraja & Co. . The ld. D.R. further pointed out that in the case of the assessee, technical know-how obtained by the assessee constituted acquisition of enduring advantage and the amount paid either as lump-sum payment or as engineering service fees was not allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Co. was not available, but when he considered the same in the subsequent assessment year 1990-91, the above case from the Hon'ble Supreme Court was available and he rightly applied ratio of the same to the facts of the case of the assessee. We accordingly hold that the case of the assessee stands squarely covered by the decision of the Hon'ble Supreme Court in the case of N.C. Budhiraja & Co. and accordingly allow the assessee's ground No.1 in the assessment year 1989-90 and direct the Assessing Officer to allow the entire amount of Rs. 5,24,474 being technical knowhow fees paid to M/s. Bierrums. For the same reasons, we dismiss the ground raised by the Revenue in the assessment year 1990-91 where the CIT(A) has rightly treated the amount of Rs. 2,82,307 as revenue expenditure. 20. Now, coming to the payment made under the technical collaboration fees by way of lump-sum payment or by engineering service amounting to Rs. 8,19,364 constituted revenue expenditure or not, we find that in the present case it was clear from the facts on record that the assessee was already in the business of construction of high-rise structures. The knowhow which was obtained was in regard to assembli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. In our considered opinion, it is this test laid down by the Hon'ble Apex Court which has to be applied in the present case. It is a known fact that in the days of rapid technological advances, technical know-how does not remain an enduring advantage and over period of time becomes obsolete. It is further noted that the engineering Service fees paid by the assessee for the assessment year 1990-91 was to be paid after construction of first high-rise structure as per clause 5.2. Engineering service has been detailed in clause 3.2 of the collaboration agreement according to which Bierrums are required to provide different engineering services to the assessee for use of the system on the construction of natural draught towers or similar structures. Thus, it is entirely for providing engineering services that the payment is to be made by the assessee to Bierrums. Accordingly, in our opinion, the engineering services fee paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Supreme Court is a clear authority that lump-sum payment or payment once for all and payment of enduring benefit are not conclusive test. The learned counsel referred to the headnote of the judgment and submitted that the Court had held that the idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of 'capital' or 'revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must need be flexible so as to respond to the changing economic realities of business. We find that this decision of the Hon'ble Supreme Court follows the principles laid down in the case of Empire Jute Co. Ltd.'s. 23. In Indian Oxygen Ltd.'s case the assessee had made a payment to a British Company under collaboration agreement. Under the agreement, the assessee was not entitled to use information, process or inventions of the British company after termination of the agreement. The Indian Company was prohibited from disclosing this information, process and invention during the currency and also after the determination of the agreement in view of clause 11. Though the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 990-91. Since the Assessing Officer has allowed depreciation of Rs. 2,73,121 as he treated the amount as capital expenditure, he is directed to withdraw the same. 26. The next common grievance in the assessee's appeals for the assessment years 1989-90 as well as 1990-91 relates to deduction under section 32AB and the reasons for the disallowance are the same. In the assessment year 1989-90, the assessee had claimed deduction under section 32AB of Rs. 2,40,592. The auditor's report in Form No. 3AA had been obtained. The assessee had computed net amount of profit of Rs. 12,02,963. It had purchased plant and machinery worth Rs. 5,22,000. Deduction was claimed at the rate of 20 per cent of the net amount of Rs. 12,02,963. During the course of the assessment, the Assessing Officer noticed that the assessee had earned interest on fixed deposits in various deposits with companies and dividend from UTI. The assessee had also incurred expenses on interest on borrowings from banks and private parties. It had set off income from interest and dividend of Rs. 9,03,605 against total expenses of interest of Rs. 10,69,436 and net amount of Rs. 1,65,831 was debited in the Profit & loss account. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) for both the years, i.e., 1989-90 and 1990-91. According to him, the definition of profits of eligible business is on the same lines as those under section 115J. Relying on the reasoning given by the Hon'ble Supreme Court in the case of Surana Steels (P.) Ltd. v. Dy. CIT [1999] 237 ITR 777, the learned DR pleaded that the expression profits of the business has to be construed in the sense in which it is understood under the Income-tax Act and the concept of Companies Act cannot be imported. He submitted that the provisions of computation of profits of eligible business are necessary provisions and they have to be interpreted reasonably. He, thus, supported partial disallowance of the assessee's claim under section 32AB. 30. We have considered the rival submissions and perused the facts on record. We agree with the learned counsel that the issue is covered by the decision of this Bench in the case of Maharashtra Scooters Ltd. where the reference filed by the Department has also been rejected. In this case, the Tribunal has held that provisions of sub-section (3) of section 32AB read with Part II of the Sixth Schedule and also as clarified by the Board's Circular No. 461, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the provision must be understood in the sense in which it was considered under the statute from which it was taken and for this reason, computation of profit has to be made as understood under the Companies Act. Accordingly, we do not find any merit in the contentions of the ld. D.R. These grounds are accordingly allowed. 32. In the assessee's appeal relating to assessment year 1989-90 (ITA No. 214/PN/94), there is yet another ground which reads as under: "The ld. CIT(A) erred in confirming disallowance of Rs. 1,88,934 being expenses on foreign education of Shri K.P. Vora who was an apprentice in the appellant firm and whose education is going to be of substantial benefit to the appellant's business. The addition may kindly be deleted: 33. During the course of assessment proceedings, the Assessing Officer noted that the assessee-firm had incurred expenses of Rs. 1,88,934 on the foreign education of Shri K.P. Vora. Details of these expenses are given on p. 30 of the paper book. Air ticket expenses are of Rs. 6,850, while rest of the expenses are on tuition fees paid. Shri K.P. Vora is the nephew of Shri Jayantilal P. Vora, partner of the firm. It was stated before the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's business, the relationship is not intimate or direct and, therefore, there was no direct relation with the business of the assessee. According to him, therefore, the expenditure was incurred on a close relative of the partner and could not be considered to be wholly and exclusively for the purpose of the business. 34. On appeal, the ld. CIT(A) concurred with a view of the Assessing Officer. The assessee had relied on the decision of the Hon'ble Bombay High Court in the case of Sakal Papers (P.) Ltd. v. CIT [1978] 114 ITR 256. According to the CIT(A), this decision was distinguishable because in the present case the expenditure was incurred for an apprentice who is not an employee. The assessee had claimed before the CIT(A) that the assessee had entered into an agreement or bond which bound Shri K.P. Vora to work at least for 3 years by way of service on return from foreign country. 35. Shri K.A. Sathe, the learned counsel for the assessee, submitted that Shri K.P. Vora was the most suitable candidate in the assessee's business and just because he happened to be a relative of one of the partners did not take away his credit in acquiring degrees abroad and in India. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned counsel for the assessee and hold that Shri K.P. Vora was the most suitable candidate in the assessee's business and just because he happened to be a relative of one of the partners did not take away his credit in acquiring degrees abroad and in India and the fact that he was related to a partner was no dis-qualification. The fact that nobody-else was sent abroad could not affect the admissibility of the expenditure in any way. Before proceeding to USA, Shri K.P. Vora had obtained a degree in engineering and he was sent to the University of California, Berkley, for getting post-graduate degree in structural engineering; he had entered into an agreement with the assessee-firm to serve it after coming from USA for three years; he actually served the firm and later on also joined as a partner. Accordingly, we do not find any merit in the contention of the Assessing Officer that the degree in structural engineering only was of indirect benefit to the assessee because the assessee was not an ordinary contractor doing petty jobs, but was undertaking large contracts of structural engineering. A degree obtained by Shri K.P. Vora in structural engineer abroad could be of immense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducation in structural engineering and by no stretch of imagination, it could be said that there was no nexus whatsoever between such education and the business of the assessee. 40. In the light of the above discussion, we hold that there is no justification for disallowing the impugned expenditure of Rs. 1,88,934. This ground accordingly succeeds and is allowed. 41. In the result, assessee's appeals are allowed and Revenue's appeal is dismissed. ITA. No. 214/PN/94, 841/PN/95 & 886/PN/95 -A.Y -1989-90, & 1990-91 Per V.B.S. Bedi Judicial Member 42. I have had an occasion to go through the proposed order passed by the learned Accountant Member but despite my best persuasion of myself. I have not been able to agree with ground No.3 of the assessee's appeal for assessment year 1989-90 (ITA No. 214/PN/1994) but on other grounds, I fully agree with the findings and conclusions as drawn by him and my reasons for being so are as under. 43. As regards ground No.3, as far as details about the point at issue and arguments of both the sides are concerned, those are appropriately recorded in the proposed order, so they are being repeated for the sake of brevity. 44. The question before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vora was obliged to join the firm after completing education. 46. It is the case of the department that the expenditure was incurred only because Shri K.P. Vora was a close relative of one of the partners and nothing has been placed on record to show that there was any nexus between the said expenditure and the business of the assessee. Moreover, prior to sending Shri K.P. Vora for foreign education he was not an employee of the assessee-firm and that is why no expenditure has been debited in the P&L a/c in this regard. The story of internship is also not supported by documentary evidence. Moreover, details of his being available after having done his degree in engineering from Ahmedabad is also not made available on record. In order to cover and get benefit of the expenditure incurred on relative by one of the partners of the firm an agreement has been drawn in which said Shri K.P. Vora has been shown to be employee without salary for the period his being in abroad in the so called agreement dated 11-8-1988, whereas expenditure on tickets, tuition fees, etc., at Rs. 6,850 and Rs. 77,498 respectively, had already been expended. So this appears to be just a cover. If he was speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee claimed that an expenditure of Rs. 60,678 incurred by it for the training of V be allowed as business expenditure. The ITO rejected the claim of the assessee on the ground that the expenditure was of personal nature and not a business expenditure. The CIT(A) affirmed the order of the ITO on the ground that there was no nexus between the business of the assessee and the expenditure incurred. The Tribunal allowed the claim of the assessee. On a reference: Held, reversing the decision of the Tribunal, that the expenditure incurred by the assessee had no nexus with the business of the assessee and was not deductible as business expenditure." Since facts of the present case are on weaker footing than the facts before the Bombay High Court inasmuch as in the present case it is nephew of one of the partners whereas in the case before the Bombay High Court it is the family concern of mother and four sons, where one of the sons/brother was taken as partner at the time of sending him abroad for higher education and claim was not allowed. So following ratio of the jurisdictional High Court, which is a binding precedent and squarely covers the case of the assessee, therefore, the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses on foreign education of Shri K.P. Vora?" ORDER [THIRD MEMBER] 1. This appeal came before me as a Third Member to express my opinion on the following question:- "Whether on the facts and circumstances of the case the Learned CIT(A) is justified in confirming disallowance of Rs. 1,88,934 being expenses on foreign education of Shri K.P. Vora?" 2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. The assessee claimed an amount of Rs. 1,82,094 under the head "Staff trainee account" and a further amount of Rs. 6,850 under the head "Travelling expenses" incurred in respect of foreign education of Shri Krunal P. Vora. Shri Krunal P. Vora is the nephew of Shri Jayantilal P. Vora, partner of the firm. He was sent to USA for higher education in structural engineering. The Assessing Officer held that expenses were not incurred wholly and exclusively for the purposes of assessee's business. As such, he disallowed the same. CIT(A) confirmed the disallowance. 3. I have perused the conflicting orders passed by the Tribunal. I have also examined the relevant documents and papers available on record. The assessee did not file any evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he paper, starting as an apprentice, from September, 1955. She was sent to USA in 1960, for specialised education in journalism and business administration. The directors believed that it would be good for the progress of the paper. She attended the Graduates' School of Journalism at Columbia University in New York and secured the degree of Master of Journalism and, thereafter, spent three months to obtain practical training in printing and lithography. On her return from USA, she again joined the editorial department of the company and she was still working with the company. There was no agreement between her and the company binding her to serve the company for a specified period of years. Assessing Officer disallowed the amount. AAC confirmed the order of Assessing Officer. The Tribunal found that selection for training in USA of the daughter could not be attributed to any extra-commercial consideration and since the company had not taken any commitment about the service from the trainee, it had not behaved in a sensible or business like manner. As such, the disallowance was upheld. The Hon'ble High Court has held that merely because there was no commitment or contract or bond ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or unmixed with any other consideration. If the expense is found to bear an element other than the trade or business interest of the assessee, the expenditure is not allowable one. 13. Taking into consideration the entire conspectus of the case I am of the opinion that there was no nexus between the expenditure and the business of the assessee-firm. As such, I am inclined to agree with the view taken by the learned Judicial Member. 14. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority. Per V.B.S. Bedi, J.M. - As there was a difference of opinion between the Accountant Member and the Judicial Member, following question was referred to a Third Member: "Whether, on the facts and circumstances of the case, the ld. CIT(A) is justified in confirming disallowance of Rs. 1,88,934 being expenses on foreign education of Shri K.P. Vora?" 2. The learned Vice-President, Shri M.K. Chaturvedi, sitting as Third Member, by his opinion dated 5-3-2003, has concurred with the view of the Judicial Member. In accordance with the majority view, we hold that the ld. CIT(A) is justified in confirming the disallowance of Rs. 1,88,93 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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