TMI Blog2002 (3) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... s detailed in Annexure-I to the agreement. Copy of the agreement is placed in the paper book at pages 19 to 57. Clauses 10 to 13 of the agreement state that the German Co. would transfer to the Indian company certain information, data, documentation, commercial knowledge, experience, skill and services relating to the designs, processes etc. concerning the manufacture of the contract products. Under the agreement the assessee company has been allowed exclusive rights and licences for the manufacture of the contract products. Clause 13 contains the recitals that the assessee company has made a composite application for industrial licence and also for approval of foreign collaboration to the Govt. of India and in pursuance thereof the industrial licence already issued to the assessee has been amended by the Govt. Articles II of the agreement spells out various rights acquired by the assessee under the agreement. The assessee acquired exclusive right to manufacture contract products in India and market the same anywhere in the world subject to the condition that effective date would commence when the German Co. has acquired 13.99% of the paid up share capital of the Indian Co. Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. There is no provision in the agreement for the return of the documentation, technical information, designs etc. after the expiry of the agreement. The assessee thus acquired the technical knowhow, documentation etc. for an indefinite period of manufacture of the contract products. Such products manufactured by the assessee by utilisation of the technical knowhow could be marketed in India as well as abroad without any restriction. The assessee was further entitled to sub-licence the technical know how processes etc. acquired by it under the agreement on the terms and conditions agreed by the German Co. 9. Under the aforementioned collaboration agreement the assessee paid lump sum payments aggregating to Rs. 14,50,249 during the year which comprised the first instalment against receipt of documentation and second instalment on commencement of commercial production of first item HF-21 of product group No. 1 as per clause XVII of the agreement. The assessee claimed deduction of the entire payment of Rs. 14,50,249 under the provisions of section 37(1) as revenue expenditure whereas the CIT(A) held that under the provisions of section 35AB the assessee is entitled to deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reads as under: "For the purpose of this section, 'knowhow' means any industrial information of 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)." From the facts, as indicated hereinbefore it is clear that the assessee has paid lump sum consideration of Rs. 14,50,249 for acquiring technical knowhow relating to the manufacture of components of textile machinery and therefore 1/6th of the consideration qualifies for deduction for assessment year under appeal. 13. The contention of the ld. counsel is that the expenditure incurred during the year under the collaboration agreement is of the nature of revenue expenditure and would accordingly fall under section 37(1). This contention is, in our opinion, entirely misconceived and deserves to be rejected. Section 35AB does not speak of the nature of the expenditure being capital for the purpose of applying the provision. If the Legislature intended that section 35AB would be applicable only in respect of the expenditure being capital in nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorporated in the Accounting Standards formulated by the Institute of Chartered Accountants of India. In measuring profit for any financial period, expenses and revenues are matched in a realistic way i.e. they concern the same goods and same time period. The accrual concept is an accounting system which recognises revenues and expenses as they are earned or incurred respectively without regard to the date of receipt or payment. In the preparation of the P L account for an accounting period revenues and expenses are recognised as they are earned or incurred respectively not as cash receipt or paid. The earning of a revenue and the expenses incurred in relation to such revenue needs to be related to specific time periods. The matching concept, which is an essential part of accrual accounting thus envisages proper allocation of cost into appropriate periods so that relevant income and expenses are matched. Section 35AB is primarily intended to incorporate matching concept into the commercial accounting for the purpose of arriving at profits of an enterprise in a realistic manner. 16. We may at this stage refer to the decision of Hon'ble Supreme Court in the case of Madras Industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egislative intent contained therein. Any attempt to take resort to semantic exercises and legal quibbling based on the legal connotation of ownership rights under the sale of Goods Act. Contract Act or other such statutes would be an exercise entirely futile, unnecessary and irrelevant. The provision appearing in a tax statute addressed to the commercial world would necessarily have to be read in the context of prevailing commercial realities and business environment. 18. We may now consider the applicability of section 37(1) which has been very strenuously canvassed by the learned counsel for the assessee Section 37(1) reads as under: "Section 37(1): Any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'profits and gains of business or profession'." Section 37(1) is a general provision and specifically excludes expenditure covered under the provisions of sections 30 to 36. Thus there is a specific and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure is capital or revenue in nature. Applying the ratio of the aforementioned decisions of the Apex Court in the instant case, since the assessee is entitled to use the technical information for the manufacture of the products even after the termination of the agreement and the documentation, drawings are not to be returned back on expiry of the agreement after 10 years, the expenditure is clearly capital in nature, and outside the purview of section 37(1). 20. There is no disputing the facts that acquisition of the technical knowhow by the assessee company for manufacture of new textile machinery components as specified in the agreement without any limitation with regard to utilisation period thereof has resulted in an enduring benefit to the assessee which lies in the capital field. The expenses have essentially resulted in augmentation and expansion of the profit-earning apparatus of the assessee company. Such expenses which are inextricably connected with the capital structure of the company would clearly be of capital nature and therefore outside the purview of section 37(1). It has been held by the Hon'ble Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the instant case. 22. For the aforesaid reasons we uphold the conclusion of the CIT(A) that 1/6th of the amount paid during the year by the assessee to the German Co. would be deductible under section 35AB. This ground is therefore dismissed. 22(a). We may now deal with the alternative contention of the assessee to the fact that section 35AB permits deduction of 1/6th of the total fees payable and not 1/6th of the amount paid during the year. The assessee contended that technical knowhow including documentation, designs, technical reports etc. in respect of three product groups namely I, III and IV have been received during the year and accordingly the entire technical knowhow in respect of these three groups may be adopted for the purposes of working out the deduction at the rate of 1/6th of the amount. In support of the contention reliance is placed on the decision of Madras Bench of the Tribunal in the case of Teletherm Instrument Co. (P.) Ltd v. ACIT [1993] 45 ITD 203. The ld. counsel invited our attention to page 57 of the paper book which gives the break up of the technical knowhow fees payable in respect of different product groups. For example, in respect of product g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (BIFR for short) vide its order dated 5-9-1991 sanctioned the rehabilitation scheme providing for writing down off the existing paid up equity and preference share capital to 10% of the face value. Accordingly the assessee company wrote off Rs. 33,75,000 during the year. The Assessing Officer rejected the claim of deduction of Rs. 33,75,000 as business loss. The ld. CIT(A) upheld the conclusion of the Assessing Officer holding that writing down off the value of investment cannot be allowed as revenue loss. 24. Shri M.P. Deodhar, the ld. counsel for the assessee invited our attention to written submissions made before the CIT(A) appearing in the paper book from pages 6 to 10. The ld. counsel argued that the assessee company had made investment in the sick textile mill situated near its own factory so as to secure the facility of full pledged R D centre which would enable the assessee company to improve upon the quality of textile machinery components by having field trials in the textile mill. The ld. counsel submitted that such test and trials conducted at the premises of SOGTM would result in savings of huge expenditure. For the aforesaid reasons, the assessee company extend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors to be entered into between the company and Star of Gujarat was then placed before the Board for approval after some discussions the Board approved the draft of the Agreement and passed the following resolution. 'It was resolved that the company do enter into an Agreement with Star of Gujarat Textile Mills Ltd. (hereinafter called 'Star of Gujarat') as per the draft agreement prepared by the company's Solicitors M/s. Mulla Mulla Craigie Blunt Caroe which draft is placed before the Board and is hereby approved'." It is further stated that in the year 1986 SOGTM was declared as sick unit. Ever since 28-7-1987 the mill ceased working. The Board of directors of SOGTM made a reference to the BIFR for rehabilitation of the company. Under the rehabilitation scheme, investment of the assessee company in the paid up share capital of the said subsidiary amounting to Rs. 37,50,000 (300 equity shares of Rs. 125 each) has been written down to 1096 of the face value resulting in the write off of Rs. 33,75,000-during the year under assessment. In support of his contention that the amount of Rs. 33,75,000 is a revenue loss. Shri Deodhar heavily relied upon the decision of Bombay Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision is based on entirely distinguishable set of facts and does not help the case of the assessee. In the said case Camlin Pvt. Ltd. engaged in the business of production of stationery and artist material entered into an agreement with a Malaysian Company to carry on the business in the joint venture. In lieu of cost of machinery, raw material and supply of technical knowhow by Camlin to the Malaysian Company, 6,80,000 shares Were allotted to the assessee valued at Rs. 23,80,822, Under the agreement Camlin as well as the Malaysian Company agreed to incorporate a private limited company in Malayasia for manufacture of products under the trade marks owned by Camlin India. The entire venture however proved to be a flop and the Indian Company found it difficult to recover its dues from the Malaysian Co. due to heavy losses suffered by that company resulting in wiping out the entire equity capital. It was in the backdrop of these facts that the Bombay Tribunal came to the conclusion that the loss suffered by the Indian Co. during the course of carrying on of its business is of the nature of business loss. The facts in the instant case are entirely distinguishable inasmuch as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits. A similar view has been taken by the Madras High Court in Addl CIT v. BMS (P.) Ltd [1979] 119 ITR 321 and in CIT v. Dhandayuthapani Foundry (P.) Ltd [1980] 123 ITR 709 (Mad.). The aforesaid decisions are clearly distinguishable inasmuch as investments made are directly connected with the regular business operations and therefore bear an intimate nexus with the assessee's business. These decisions do not advance the case of the assessee. 34. For the foregoing reasons we hold that the loss sustained by the assessee company incurred during the course of acquisition of capital investment and cannot therefore be allowed as business loss. We uphold the conclusion of the CIT(A) on the issue. 35. The ld. counsel for the assessee has raised the alternative contention that the amount be allowed as a long-term capital loss on the basis of the decision of Gujarat High Court in Kartikey V Sarabhai v. CIT [1982] 138 ITR 425. We are inclined to accept the alternative contention and direct the Assessing Officer to treat the loss as long-term capital loss. 36. In the result, the assessee's appeal is partly allowed as above. 37. Now we take up the revenue's appeal ITA No. 3422/95. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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