`IN
THE ITAT
Siel
Limited
v.
Deputy
Commissioner of Income-tax
R.
V. EASWAR, VICE PRESIDENT
AND
R. C. SHARMA, ACCOUNTANT MEMBER
IT
APPEAL NOS. 262 & 799 (
[ASSESSMENT
YEAR 1995-96]
NOVEMBER
23, 2007
I Section 37(1) of the
Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year
1995-96 - A company ‘I’ was manufacturing hard metal tools in India - This
company ‘I’ was amalgamated with the assessee-company - Thereafter
assessee-company entered into a technical know-how agreement with an Austrian
company, which was also engaged in manufacture and sale of hard metal tools -
Assessee paid certain amount as technical know-how fees to Austrian company and
claimed deduction of same as revenue expenditure - Lower authorities treated
payment in question as capital in nature and, accordingly, disallowed
assessee’s claim - Whether since under know-how agreement what assessee
obtained was only right to use technical know-how and Industrial Property
Rights which were property of Austrian company and Austrian company did not
part with proprietary or ownership rights therein in favour of assessee and,
moreover, since assessee’s business of manufacture of hard metal tools was not
a new business in year under consideration and payment under agreement was only
for use of know-how during currency of agreement, which was for a limited
period, it could be said that no enduring benefit had been obtained by assessee
under agreement - Held, yes - Whether, therefore, impugned expenditure was
revenue in nature and was allowable as claimed by assessee - Held, yes
II Section 72A of the
Income-tax Act, 1961 - Losses - Carry forward and set off of accumulated loss,
etc., in case of amalgamation - Assessment year 1995-96 - For relevant assessment
year 1995-96, assessee-company claimed set off of certain unabsorbed
depreciation brought forward from assessment year 1994-95 which related to
subsidiary of the assessee-company which got amalgamated with assessee-company
- Assessing Officer disallowed assessee’s claim - Whether since in instant case
amalgamated company, viz., assessee did not furnish along with its returns of
income, a certificate from certified authority to effect that adequate steps
had been taken by it for rehabilitation or revival of business of amalgamating
company, in such circumstances, it could be said that assessee failed to fulfil
condition of section 72A(2) - Held, yes - Whether, therefore, assessee’s claim
was rightly disallowed - Held, yes
A company ‘I’ was manufacturing hard metal tools in
On appeal, the Commissioner (Appeals) upheld the impugned order.
On second appeal:
A conjoint reading of the relevant clauses of the know-agreement showed
that what the assessee obtained there-under was only the right to use the
technical know-how and the Industrial Property Rights (IPR) which were the
property of the Austrian company, and that the Austrian company did not part
with the proprietary or ownership rights therein in favour of the assessee
company. The assessee-company was
referred to in the agreement only as licencee.
The assessee was also prohibited from disclosing the technical know-how
to others except to the sub-contractors and that too only to the extent
necessary for the manufacture of the product and only under strict control and
supervision of the assessee. Further,
any manufacturing facilities, as distinct from supply of technical know-how
which were to be provided by the Austrian company were to be separately agreed
upon as regards their terms and conditions and would not form part of the
technical know-how to be provided under the agreement. The assessee was also responsible for the
quality of the products over which the Austrian company had rights of
supervision and any expenditure in submitting the products for the inspection
of the Austrian company was to be borne by the assessee. Further, there was no royalty payment under
the agreement and the royalty was to be paid only if a joint venture company
could not be established within 12 to 18 months of the coming into effect of
the technical know-how agreement. The
assessee was also responsible for any infringement of the IPR of the Austrian
company. These provisions are consistent with the Austrian company remaining
the owner of the know-how, with the assessee being merely allowed to use the
know-how for a limited period of 7 years. Further, the assessee was to maintain
secrecy of the know-how used by it. It
was only where the contract which was for a period of eight years expired in
the normal course that the assessee was permitted to continue to use the
know-how and the IPR for manufacturing the products. Even here, the assessee could not use the
trademark of the Austrian company. On
the other hand, if the contract was terminated then the assessee was under a
disability to use the know-how or IPR and was under an obligation to return, at
its own expense, all the documents and materials embodying the know-how to the
Austrian company. Further, the period of
eight years prescribed in the agreement could by no means be said to be a long
period, considering the technological changes.
No doubt, the agreement obliged the Austrian company to offer any new
technology developed by it to the assessee in the first instance but only on
such terms and conditions as may be mutually agreed between the parties and if
the assessee did not accept the offer of new technology, the Austrian company
was free to offer the same to any third party in the territory. Therefore, any updating or new development in
the technology was not to be automatically given for the assessee’s use and was
not covered under the agreement and it was necessary for the parties to enter
into another agreement with separate terms and conditions and that too only if
the assessee was interested in the new technology. Thus, it was not the automatic responsibility
of the Austrian company to let the assessee know of any changes in the
technology. The Income-tax authorities
had sought to raise two points. The first
was that the agreement was entered into in connection with the setting up of a
new business and, hence, the expenditure incurred by the assessee was capital
in nature. In the instant case the
company by name ‘I’ which was the assessee’s subsidiary, was amalgamated with
the assessee-company in the previous year relevant to the assessment year
1994-95 and thus the manufacture of hard metal tools became part of the
assessee’s business in that year.
Therefore, the business of manufacture of hard tools could not be said
to be a new business in the year under consideration. The other point made by the Income-tax
authorities was that the assessee could use the know-how even after the expiry
of the agreement. Applying the judgment of the Madras High Court, in the case
of CIT v. Brakes India Ltd. [1982] 136 ITR 322 (
For the relevant assessment year 1995-96, the assessee-company claimed set off of certain unabsorbed depreciation brought forward from the assessment year 1994-95 which related to subsidiary of the assessee company which got amalgamated with the assessee company in the previous years relevant to the assessment year 1994-95. The Assessing Officer disallowed the assessee’s claim.
On appeal, the Commissioner (Appeals) upheld the impugned order.
On second appeal :
Under section 72A(2) two conditions are prescribed for carry forward and
set off of the unabsorbed depreciation relating to the amalgamating company
against the income of the amalgamated company.
The first is that in the year in which the set off is claimed the
business of the amalgamating company should be carried on by the amalgamated
company without any modification or reorganisation or with only approved
modification or reorganisation. There
was no dispute that this condition was satisfied in the instant case. The second condition is that the amalgamated
company, viz., assessee did not furnish, along with the return of income for
the year in which the set off is claimed, a certificate from the certified
authority to the effect that adequate steps have been taken by it for the
rehabilitation or revival of the business of the amalgamating company. In the instant case the assessee had not
filed such a certificate. The certificate
was not even filed before the assessment proceedings were completed or before
the first appellate authority or even before the Tribunal. Therefore, the lower authorities were right
in their refusal to set off the unabsorbed depreciation against the assessee’s
income for the year under appeal. (
1. It was also held by the Tribunal that the amounts received by the assessee on account of commission had rightly been included in the total turnover of the assessee for purposes of computing deduction under section 80HHC.
2. It was further held by the Tribunal that the amounts collected by the assessee on account of excise duty were wrongly included in the total turnover of the assessee for purposes of computing deduction under section 80HHC.
3. It was also held by the Tribunal that the amount collected by the assessee under the U.P. Sheera Niyantran Act, 1964 for construction of a molasses storage tank was not liable to be included in the total turnover of the assessee for purposes of computing deduction under section 80HHC, as the assessee had no power or control over the fund.
4. Where the assessee-company had incurred certain expenditure in respect of the issue of non-convertible debentures (NCD) and adjusted the same against the share premium account in the account books and further in the return of income claimed the said expenditure as deduction, the expenditure in question in view of the judgment of the Supreme Court in the case of India Cement Ltd. v. CIT [1966] 60 ITR 52 (Mad.) was allowable as business expenditure even though the assessee did not debit the expenses in the profit and loss account but chose to reduce the same from the share premium account.
5. Where the assessee made payment for voluntary retirement of service under the VRS Scheme approved by the Chief Commissioner and claimed deduction of the same as a revenue expenditure, the impugned payment in view of the judgment of the Supreme Court in the case of Sassoon J. David & Co. (P.) Ltd. v. CIT (1979) 118 ITR 261/1 Taxman 485 and on the basis of catena of decisions, in which a similar issue was decided in favour of the assessee, was allowable as a revenue expenditure.
6. Where the Assessing Officer had included the amount collected by the assessee for construction of molasses storage tank in the total turnover of the assessee for purposes of computing deduction under section 80HHC since the amount was collected by the assessee under the U.P. Sheera Niyantran Act, 1964, under which the utilization of the amount was controlled under the aforesaid Act and that the assessee had no control or power to utilize the amount as it liked, the amount could not be added in the total turnover for purposes of computing the deduction under section 80HHC.
CASE REVIEW
CIT v. Brakes India Ltd. [1982] 136 ITR 322 (
India Cement Ltd. v. CIT [1966] 60 ITR 52 (SC) followed.
Sassoon J. David & Co. (P.) Ltd. v. CIT (1979) 118 ITR 261/1 Taxman 485 (SC) followed.