TMI Blog2007 (12) TMI 305X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 is with regard to disallowance of technical fees under section 40( a )( i ) of the Act. The facts are that the assessee during the year paid technical services fees and deducted tax on this fees so paid in the relevant financial years, but has not deposited the same into the Government account during the respective financial years, the Assessing Officer, not being satisfied with the explanation offered by the assessee, disallowed the technical fees paid. On appeal, the CIT(A) also concurred with the view of the action of the Assessing Officer. 3. We have heard Shri F.V. Irani on behalf of the assessee, who submitted that the issue is covered in favour of the assessee by the following decisions of the Tribunal : ( i ) Hazira Marine Engineering Construction Management (P.) Ltd. v. ITO [IT Appeal No. 7512 (Mum.) of 2005]. ( ii ) ITO v. Forasol Ltd. [1975] 1 TTJ 78 (Jp). ( iii ) Minda HUF Ltd. v. Addl. CIT [2004] 2 SOT 475 (Delhi), and ( iv ) Jt. CIT v. Modi Olivetti Ltd. [2004] 84 TTJ 1038 (Delhi). The learned departmental representative, though not leaving his ground, could not controvert the above legal propositions, but maintained that the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions of the co-ordinate benches, we have to necessarily hold that the CIT(A) was not justified in confirming the action of the Assessing Officer in making the disallowance under section 40( a )( i ). The Assessing Officer is directed to allow the deduction of technical fees paid as claimed by the assessee. However, the Assessing Officer may withdraw the deduction allowed in the subsequent assessment years on payment basis. This ground of the assessee succeeds in all the three years. 6. The next issue for consideration is an alternative claim for technical fees disallowed in immediately preceding assessment. This issue is raised for only assessment year 1998-99. In view of our decision above on the issue disallowance under section 40( a )( i ), this ground of the assessee has to fail. 7. The next issue pertains to provision for warranty. This issue arises in assessment years 1996-97, 1997-98, 1999-2000 and 2000-01. The assessee is engaged in the business of supply of paint finish system for automobiles and white goods industry. The assessee has provided for warranty @2 per cent of the value of the turnover booked in each year in its books, claiming to be on accrual b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) (P.) Ltd. v. ITO [IT Appeal No. 1506 (Bom.) of 2001, dated 10-4-1991] 7. Hindustan Dorr Oliver Ltd. [IT Appeal No. 7255 (Bom.) of 1988, dated 25-5-1993] 8. Hero Honda Motors Ltd. v. Jt. CIT [2005] 3 SOT 572 (Delhi) 9. Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) 10. CIT v. Indian Transformers Ltd. [2004] 270 ITR 259 (Ker.) 11. Voltas Ltd. v. Dy. CIT [1998] 64 ITD 232 (Mum.) 12. CIT v. Majestic Auto Ltd. [1993] 204 ITR (AT) 14 (Chd.) 13. Jay Bee Industries v. Dy. CIT [1998] 66 ITD 530 (Asr.) 14. CIR v. Mitsubishi Motors New Zealand Ltd. [1996] 222 ITR 697 (PC) The learned departmental representative, on the other hand, relied on the orders of the authorities below and contended that the assessee claims for deduction of a contingent liability and thus it is not allowable as a revenue deduction. 9. We have heard the rival submissions and perused the material available on record. We find that the case laws relied upon by the learned counsel for the assessee are squarely applicable to the facts of the case of the assessee. The accounting principles demand that the balance-sheet of a company reflects the true and correct affai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under section 115JA. The assessee, relying on the judgment of the Hon ble Apex Court in the case of State Bank of Patiala v. CIT [1996] 219 ITR 706 replied that the law did not provide for such adjustment. The Assessing Officer, however, relying on the judgment of the Hon ble Madras High Court in the case of Dy. CIT v. Beardsell Ltd. [2000] 244 ITR 256 added back the provision for bad debt while computing the book profit. Before the CIT(A) the assessee contended that the provision for doubtful debts has been set apart by the company for a loan or existing liability. It is not a contingent liability but a liability that has arisen during the year on account of debts. The loss on account of debts not being realisable cannot be treated as provision against liability. Reliance was placed on the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 wherein the Hon ble Apex Court pointed out the difference between a provision and a reserve and held that if the retention or appropriation of a sum falls within the definition of provision, it can never be a reserve. On the strength of this judgment the assessee contended before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion expenses. The Assessing Officer, basing on the report of the auditors in form 3CD noted that a sum of Rs. 1,82,457 was qualified as business development expenses by the auditors has not been considered by the assessee as entertainment expenditure. The lower authorities relying on the judgment of the jurisdictional High Court in CIT v. Indian Plastics Ltd. [1999] 240 ITR 528 (Bom.) held 50 per cent of the above amount as entertainment expenditure. The contention of the assessee is that the authorities below should have excluded the amount from the purview of disallowance under section 37(2) in the light of the judgment of the Hon ble Karnataka High Court in CIT v. Mysore Minerals Ltd. [1986] 162 ITR 562 . We have considered the submissions of the rival parties. The business development expenses have been stated to have been broadly incurred on the employees of the assessee. The Hon ble jurisdictional High Court has clearly held that in such situations, such expenditure should be considered as entertainment expenditure within the meaning of sub-section (2A) of section 37 and the deductibility thereof has to be decided in the light of restrictions contained therein. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng work to be carried out only at HDI. Out of the total purchases of Rs. 2,16,21,827 the major import during the year is towards the designing the drawing to be carried out on the work relating to the GMI order. ( ii ) Payments made to Josts Engg. Co. Ltd. (JE), India ( a ) Salary for staff on deputation : During the year 1995-96 Haden Josts Engg. India Ltd. (HJE) had no employees on its roll. More than 70 people who were working for HJE were employees of JE. Actual salaries and other benefits have been reimbursed by HJE to JE. ( b ) Other services : During the impugned assessment year, HJE had been using various services rendered by JE, like office premises, cars, telephones, fans, security, EDP Management, Personnel Management, Canteen, etc. Also JE is having established offices in various places in India. These offices also were being used for HJE work. HJE has reimbursed such expenses to JE to the extent of Rs. 24,81,405. ( c ) Purchase of Goods : Here assessee enclosed a statement of purchases made from JE and contended that JE is one of the leading fabricators of quality goods which were being supplied in paint finishing system. During the year the assessee pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. Further that the foreign company HDI was charging for design and engineering charges to the tune of Rs. 1,62,80,000 whereas it was incumbent upon HDI to provide such services being 51 per cent partner. Thus, according to the Assessing Officer, HDI by contributing only a sum of Rs. 51 lakhs by way of share capital has taken back a sum of Rs. 1,62,80,000 by way of design charges only. It was noted down by the Assessing Officer that even though the Indian company was having only 49 per cent shareholding, everything was charged to the profit and loss account of the assessee-company. The Assessing Officer then looked into the approval letter of the RBI dated 30-4-1994 and found that paras 5 6 of the said approval letter did not contain anything about the travelling expenses to be borne by the assessee-company. Further the assessee had entered into technical agreement on 28-7-1995 and incorporated such clauses, where the entire burden had been shifted on to the shoulders of the joint venture. The terms and conditions were not inspiring any confidence particularly when the joint venture directors are common. According to the Assessing Officer, in the name of equity participation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee had subsequently filed return of income on account of the fact that the assessee was liable to incur the said expenditure during the year. The Assessing Officer denied the deduction to the assessee on erroneous presumptions and without any basis. 17. On the basis of the above submissions, the CIT(A) required the assessee to furnish following details : "( a )Whether the joint venture agreement entered into originally as well as supplementary were approved by the RBI? If so, copies of the RBI s approval may please be furnished. ( b )Please get me a copy of the application dated 12-4-1994 filed before the RBI for foreign collaboration. Also clarify whether yours is a foreign collaboration or a joint venture ? ( c )Could you please make me available a copy of the shareholders agreement dated 24-9-1995 and a copy of the supplementary agreement dated 11-9-1995. ( d )Please make me available a copy of the correspondence to indicate that the assessee-company tried to din into the HBI Gears that the expenditure incurred on such side was higher and should not be borne by the assessee company. Also let me know the details such as name of the technicians, amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also been discharged, the expenditure would be eligible for a deduction under section 37(1) of the Act." 18. The learned CIT(A) analysed the shareholders agreement, and in that he found that the assessee-company is not supposed to incur any material expenditure or liability of a capital nature without any resolution having been passed by the Board of Directors. To cap it all, the assessee was also not supposed to enter into any material contract or arrangement outside the country in the ordinary course of its business or whereby any person would or might receive remuneration calculated by reference to its income or profits. In the instant case, facts bear out that no such resolution was ever passed by the Board of Directors permitting the assessee to bear any expenditure in respect of the so-called travelling expenses of the foreign technicians deputed by HDI. Further a close look into the conditions delineated in the shareholders agreement approved by the RBI made abundantly clear to the CIT(A) that as per the terms of collaboration, royalty @ 5 per cent of domestic sales and 8 per cent of exports, inclusive of taxes was to be paid to HDL as per the technical collaboratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge control Department: ( a )Foreign Inward Remittance Certificate issued by an Authorised Dealer in Foreign Exchange evidencing receipt of share subscription from the collaborator. ( b )A Chartered Accountants Certificate indicating the latest pattern of shareholding of your company. ( c )A certified copy of the collaboration agreement. ( d )A copy of the industrial licence wherever applicable. ( e )Certified copy of the Memorandum and Articles of Association of the Company. 11. Please also ensure that particulars as per the enclosed QUESTIONNAIRE are sent direct to S.I.A., G.O.I., New Delhi on half-yearly basis as indicated in the QUESTIONNAIRE." On the basis of the above terms and conditions, according to the CIT(A), it was evidently clear that the assessee was not burdened with the responsibility or obligation of meeting the so-called travelling expenses to the tune of Rs. 1,56,06,665. The facts further revealed to the CIT(A) that the assessee drew up another supplementary agreement dated 11-9-1995 wherein also no such clause is mentioned requiring the assessee to meet the so-called travelling expenses of the so-called technicians. The supplementary sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the head Profits and gains of business or profession . Thus, in order to be deductible as a business expenditure, the amount in question must fulfil that - ( i ) expenditure in question must be laid out wholly and exclusively for the purpose of assessee s business; and ( ii ) it should not be an expenditure of a capital nature. Fulfilling of these conditions is a sine qua non for qualifying for deduction under section 37 of the Act. In the instant case, it has not been clearly established that the said expenditure has been laid out wholly and exclusively for the purpose of the business of the assessee. On the other hand, the Assessing Officer has clearly established that the foreign collaborator had already extracted maximum benefit from the assessee in the sense that the foreign collaborator had taken back a sum of Rs. 1,63,80,000 by way of royalty etc. Considering the above facts, the CIT(A) was of the opinion that the claim of the so called deduction on account of the travelling expenses in the revised computation of income is out and out an afterthought to get the tax liability reduced. Further, the entire transaction appears to be a collusive transaction and colourable d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to it. Expenditure of one company has been accepted as the expenditure and liability of another company due to the fiduciary relationship that existing between them. Such expenditure cannot be held to be for the purpose of business of the assessee-company. As rightly pointed out by the first appellate authority there is no statutory approval by the Reserve Bank of India for incurring of this expenditure. Had this been the original terms of agreement, then the same would have been part of the terms furnished to the RBI. An expenditure cannot be allowed in the hands of the assessee-company on a reason that the top management of the foreign company which is a majority holder of shares had directed that this expenditure be borne by the assessee-company. Though the term, "for the purpose of business" is wide and has to be viewed from the point of view of a business man, the expenditure which rightly belongs to one company cannot be transferred to the other company and claim it as expenditure in the hands of that company, when such expenditure is not the bona fide expenditure of that company. The assessee has admittedly in its reply to the Assessing Officer stated that HJE management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Penalty appeal - Assessment year 1999-2000 23. This appeal filed by the assessee challenges the confirmation of penalty levied under section 271(1)( c ) of the Act at Rs. 11,50,659. The facts leading to the levy of penalty are that an amount of Rs. 32,87,596 was added during the year, besides other additions, by the Assessing Officer on account of reversal of provision for bad debts. The assessee had filed the details of other income which included, right back of provision for doubtful debts at Rs. 32,87,596. The assessee contended that the impugned amount had been disallowed in the earlier assessment year 1997-98 and thus reduced from the computation. However, from record it transpired that no such disallowance was made in assessment year 1997-98. Thus, it was held that as no disallowance made in the earlier assessment year, no allowance can be giving in this year. Thus, an amount of Rs. 32,87,596 was added to the total income and the Assessing Officer initiated penalty proceedings. In the course of penalty proceedings the assessee contended that they were under the bona fide impression that the impugned amount was offered for tax in the earlier year and hence they claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pined that, in fact, the provision created was hidden in the grouping of raw material cost and the assessee did not disallow the same of his own. It is only in the course of assessment for the impugned assessment year, and that too, on the basis of contention of the assessee that the provision was disallowed in assessment year 1997-98, the Assessing Officer found out from the assessment order of that assessment year 1997-98 that no such disallowance was made in that assessment year. Thus, the assessee has deliberately made a wrong claim of Rs. 32,87,596 on reversal of provision for bad debt during the impugned assessment year. Aggrieved, the assessee is in further appeal before us. 25. We have heard the rival contentions on the issue. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record we are of the considered opinion that the penalty in question has been rightly levied by the revenue authorities. The assessee is well established company, having professional support and experienced and professionally qualified employees. While so, making of a claim which was admittedly wrong cannot be said to be not deliberate. The facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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