TMI Blog2005 (5) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... in violation of section 40-A(9) and 40-A(10). 3. In I.T.A. No. 4119 (Del) of 2001, the revenue has taken the following effective grounds :- On the facts and circumstances of the case, the ld. CIT (Appeals) erred in:- (i)allowing depreciation amounting to ₹ 9,82,81,250 on capitalization of engineering service fee and not allowing the deduction under section 35AB; (ii)deleting the addition on account of depreciation of ₹ 5,19,68,375 in respect of addition made to fixed assets due to exchange fluctuation on account of foreign currency loan for acquiring such assets. 4. We shall first take up ground No. (i) of the instant appeals of the revenue relating to the payment of engineering services fees paid by the assessee. 5. The relevant and material facts for the disposal of the issue involved in these grounds of the appeals are that the assessee had set up a float glass plant in Gujarat on the basis of technical know-how obtained from Guardian Industries Corporation, USA. The said company also deputed its technicians for the supervision of the setting up of the plant. The aforesaid plant commenced commercial production on 1-3-1993 i.e. during the previo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notes to accounts. However, the Assessing Officer disallowed the aforesaid amount of depreciation on the ground that engineering service fee amounting to ₹ 9,82,81,250 could not be capitalized to various fixed assets and is to be allowed deduction under section 35AB of the Income-tax Act. 8. On appeal the learned Commissioner of Income-tax (Appeals) allowed the depreciation claimed by the assessee mainly on the reasoning that the expenditure incurred by the assessee in the nature of and relating to plans, design, installation, construction etc. so it would be in order to allow capitalization of such expenditure by passing a detailed order. Similarly for assessment year 1995-96 the CIT (Appeals) allowed the appeal of the assessee relying on his order passed in assessment year 1994-95. 9. Before us, the learned Departmental Representative for the revenue, supporting the order of the Assessing Officer and assailing that of the CIT (Appeals) first submitted that in the instant case the engineering service fee paid by the assessee is an intangible asset and the same was covered under the provisions of section 35AB and not under section 32, where the depreciation is only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al entered into an agreement with the assessee, placed at pages 1 to 8 of paper-book. As per para 8.1 (a )(i) M/s. Guardian International was to provide complete basic design, engineering services, training assistance to the company for setting up the float glass plant and in consideration thereof a lump sum fees amounting to 7,500,000 Dollars was to be paid by the assessee in three instalments. This means that the engineering services fee was paid by the assessee to M/s. Guardian International for setting up of the float glass plant in consideration of the engineering services etc. rendered to the assessee. Similarly, as per para 8.2(i) M/s. Guardian International was to provide supervision services etc. for the erection, commissioning and starting of the float glass plant. In the same manner there is another agreement, placed at pages 9 to 32 of the paper-book, entered between the assessee and M/s. Guardian International Corporation named as Float Plant Service agreement specifying the services rendered by M/s. Guardian International Corporation for constructing the float glass plant, specifying the meaning of Engineering Design Services, Payments and fees etc., again showing tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of 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. The meaning of know-how is given in explanation below sub-section (3) of section 35AB and the same is reproduced as under :- 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). 15. On going through these provisions together it is clear that deduction under section 35AB for the expenditure incurred for acquiring technical know-how, can be only allowed if this expenditure is incurred to acquire know-how which is likely to assist the assessee in the manufacture or processing of the goods. In the instant case, we have already held that the assessee has incurred this expenditure for setting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and issue under consideration before us because in that case the question before the High Court was regarding applicability of section 37(1) and the deductions as specified under sections 30 to 36 of the Income-tax Act whereas in the instant cases under consideration before us, we are simply required to decide whether the assessee is entitled to depreciation under section 32 or entitled to deductions under section 35AB as allowed by the Assessing Officer. For the reasons stated above, the impugned orders of the Commissioner of Income-tax (Appeals) allowing depreciation claimed by the assessee in assessment years 1994-95 and 1995-96 under consideration before us are upheld. Ground No. (i) taken by the revenue in its respective appeals is rejected. 19. Now we shall take up ground No. (ii) of the appeal of the revenue relating to the issue of contribution made to a school. 20. The relevant and material facts for the disposal of this ground of the appeal are that the assessee has incurred an expenditure of ₹ 10 lakhs towards a contribution to a school. According to the Assessing Officer the sum is required to be disallowed under section 40A(9) of the Income-tax Act, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avancore Cochin Chemicals Ltd. [2000] 109 Taxman 91, there is no illegality or infirmity in the order of the CIT (Appeals) deleting the impugned addition of ₹ 10 lakhs made by the Assessing Officer under section 40A(9)by following the order of the Tribunal of ITAT, Delhi Bench in the case of Modi Rubber Ltd. (supra) and, therefore, the order of the CIT (Appeals) in this regard is upheld and ground No. (ii) of the revenue s appeal for assessment year 1994-95 is rejected. 24. Now we shall take up ground No. (ii) of the revenue s appeal for assessment year 1995-96 relating to the issue of depreciation claimed by the assessee. 25. The relevant and material facts for the disposal of this ground of appeal are that the assessee has claimed depreciation of ₹ 5,19,68,375 in respect of addition made to fix assets due to exchange fluctuation rates on the amount of foreign currency loan taken for acquiring such assets and remaining outstanding as on the last day of relevant assessment year. 26. The Assessing Officer disallowed the aforesaid amount of depreciation claimed by the assessee on the reasoning that what is to be added/reduced to the cost of plant machinery is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have noted and appreciated the reference made to accounting policies and various court decisions including the Supreme Court. While it is the argument of the ld. Assessing Officer in the main that the liability on account of currency rate fluctuation should be considered only on the basis of payment of instalments due, the point of argument has been taken care of in the observation of the Supreme Court in the case cited about and also by the Bombay High Court deciding in effect that enhanced liability, due to exchange rate fluctuation, is an allowable adjusting to the cost of asset as on the last day of accounting. The Delhi Tribunal also further makes it clear that increased liability on the closing balance of loans outstanding on the last day of the previous year would be allowable for adjustment for depreciation under section 43A. Considering the above decisions I have no hesitation to go along with the learned views and decisions made by the higher courts and say that the enhanced liability of ₹ 5,19,68,375 on account of rate fluctuation is to be allowed for depreciation. The disallowance is therefore, deleted. 30. Before us, the learned Departmental Representative fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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