1. These cross-appeals are directed against the order of the learned CIT(A), dt. 22nd Feb., 1990 for asst. yr. 1985-86. For the sake of convenience they are being disposed of together by this combined order.
Assessee's appeal is taken up first.
2. First three grounds relate to a single issue. The issue relates to disallowance of depreciation on boiler leased to Bombay Dyeing and Manufacturing Co. Ltd. (hereinafter referred to as Bombay Dyeing for short) by applying the ratio of the Supreme Court decision in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC).
3. The facts as set out by the AO and other material on record are that Bombay Dyeing had placed an order for an efficiency with ISGEC John Thomson (ISGEC' for short) in July, 1982, through their engineering consultants Tata Projects Ltd, for a total cost of Rs. 165 lakhs. The boiler was to be installed at Patalganga for the DMT project of Bombay.
The commissioning of the boiler was to be completed by March, 1984, as per the letter dt. 1st July, 1982, written by Tata Projects Ltd. to ISGEC. Based on this letter AO concluded that the boiler was in fact commissioned by March, 1984. In arriving at this conclusion, letter dt.
22nd March, 1988, written by Bombay Dyeing to the AO was also referred to total payment of Rs. 1,65,07,738 was made by Bombay Dyeing in respect of the boiler. On 23rd March, 1984, assessee passed a special resolution altering its memorandum of association (memorandum for short). By the said alteration, assessee-company gave unto itself the power to carry on leasing business. The special resolution was approved by the Company Law Board vide its order dt. 25th Jan., 1985. On 18th Sept., 1984, Bombay Dyeing sold the boiler to the assessee-company vide invoice No. DMT/1510/ MS/3 for a total sum of Rs. 165 lakhs inclusive of Rs. 15 lakhs as sales-tax. On 26th Sept., 1984, Bombay Dyeing issued receipt to the assessee acknowledging the receipt of the sum of Rs. 165 lakhs. Thus far are the details regarding purchase of boiler by Bombay Dyeing from ISGEC, and in turn, the purchase of the same boiler by the assessee from Bombay Dyeing.
4. On 27th Sept., 1984, assessee entered into an agreement with Bombay Dyeing whereby the former leased out the boiler to the latter.
Considering the date of amending the memorandum (23rd March, 1984), AO inferred that two closely connected companies has tried to help each other and profits of the assessee-company were reduced to the extent of depreciation that had been claimed. AO considered it to be strange that whereas Bombay Dyeing was in a position to bear 98 per cent of the total cost of Rs. 100 crore project of DMT Plant, it took only one item on lease from the assessee. Further, considering the fact that the time when Bombay Dyeing decided to purchase the boiler coincided with the decision of the assessee-company to enter into leasing business, normal procedure would have been for Bombay Dyeing to enter into agreement with the assessee on that date (i.e., when it decided to purchase the boiler), and assessee should have made the payment directly to the manufacturer. According to the AO, this was a colourable device adopted by the company, which went even beyond the framework of its memorandum.
Finally, AO concluded that the transaction was not genuine and that the assessee was not the owner of the boiler. Applying the ratio in the case of McDowell (supra), depreciation of Rs. 1,65,000 was disallowed.
5. CIT(A) confirmed the disallowance mainly, for two reasons. Firstly, since Bombay Dyeing was having Nil income, it was not in a position to claim depreciation, whereas, the assessee-company was having substantial profits and could reduce the same by claiming depreciation worth Rs. 165 lakhs. Secondly, Bombay Dyeing was in a position to bear nearly 98 per cent of the project cost (Rs. 100 crores) and that there was no evidence to show that financial constraint forced Bombay Dyeing to sell the boiler and taking back the same on lease from the assessee.
6. Mr. S.E. Dastur, senior learned counsel assisted by Mrs. Arati Vissanji, appeared for the assessee. At the outset, a factual error in the assessment order was pointed out by Mr. Dastur. It was submitted that the boiler was not installed in March, 1984, as was stipulated but was installed in September, 1984. It was also pointed out that the initial lease period of eight years was extended twice for five years on each occasion to show that the asset was not ultimately sold to Bombay Dyeing at reduced price. The lease rentals earned by the assessee were subjected to tax till today and that the same were allowed as deduction to Bombay Dyeing in asst. yrs. 1985-86 and 1986-87. Then onwards the same have been disallowed.
7. Certain clauses of the lease agreement were referred to by Mr.
Dastur. As per Clause 2.3 lessor (i.e. the assessee) was permitted to take away the equipment on termination of the agreement. As per Clause 4.2, a name plate or some other mark was to be affixed to denote the exclusive ownership of the lessor. As per Clause 4.17, lease was not permitted to claim any allowance, relief, etc. available to the lessor either under the IT Act, or any other law. As per Clause 5.6, asset was to remain the personal property of the lessor notwithstanding that the same may have been affixed to any land or building. From p 17 of the paper book it was pointed out that assessee had rental income from other parties also besides Bombay Dyeing.
8. Referring to AO's allegation of having travelled beyond the scope of the memorandum, it was submitted that in that event the rental income would be assessable as income from other sources in which case depreciation would automatically follow as per Section 58 of the IT Act, 1961 (the Act). For this proposition, decision in CIT v. Katihar Jute Mills (P) Ltd (1979) 116 ITR 781 (Cal) was relied upon. It was further submitted that this was not a normal sale and lease back transaction insofar as that Bombay Dyeing never claimed depreciation on the asset as the same was not purchased by it earlier. Right from day one, the ownership was with the lessor.
9. The transaction, it was submitted, stood recognised by the legislature also inasmuch as Expln. 4A to Section 43(1) was inserted w.e.f. 1st Oct., 1996. In other words, such transaction was derecognised by the Act only w.e.f. 1st Oct., 1999, and not earlier. On the other hand, Expln. (4A) was stated to be in favour of the assessee because as per the said Explanation, depreciation could be disallowed only if the asset was used by any other person prior to the transfer.
Even if the transaction was considered to be within the purview of Expln. 4A, the WDV immediately prior to the transfer was Rs. 165 lakhs on which depreciation had to be allowed.
10. Finally, relying on the decision of the Supreme Court in the case of CIT v. Podar Cements (P) Ltd. (1997) 226 ITR 625 (SC) on the issue of updating construction, it was submitted by Mr. Dastur that the language of any law, whether statute law or as laid down by the Courts, is to be construed in accordance with the need to treat it as current law.
11. Mr. Rajendra, the learned Departmental Representative, argued the case on behalf of the Department. At the outset, a technical objection was raised by him to the effect that Mr. Dastur had raised a new plea to tax the rental income under the head "Incorne from other sources".
It was neither taken as a ground of appeal before the CIT(A) nor was it raised at the time of hearing also. Coming to the facts of the case Mr.
Rajendra submitted that assessee picked up a fuel-saving device as an asset to lease so that it can claim 100 per cent depreciation thereon.
This was essentially to reduce tax in assessee's case. Moreover, the transaction was with a sister concern, and, therefore, the ratio in McDowell & Co. Ltd.'s case (supra) applied squarely. To give colour to the transaction sales tax was also paid by the assessee to Bombay Dyeing. Patalganga was a Rs. 100 crore project out of which only one asset was picked up and leased back to Bombay Dyeing. It was submitted that per se, there was no illegality about sale and lease-back transactions, but here there was a dubious motive. Entire case had to be seen in totality. The various terms in lease deed were deliberately inserted and that the point regarding damages was never raised before the CIT(A). Thus, according to Mr. Rajendra, CIT(A) had applied her mind and since the sole motive was to reduce tax, depreciation was rightly disallowed.
12. In his rejoinder, Mr. Dastur submitted that by raising the plea regarding taxability of lease rentals under the head "Income from other sources" no new ground was sought to be raised. Distinction was drawn between a ground and an argument. It was not the plea of the assessee that rental income be taxed under the head "other sources", but merely a plea was raised that if the leasing activity was not covered by the memorandum, income therefrom had to be taxed somewhere and that somewhere would have been the head "other sources" in which event also depreciation would have been allowed. Even otherwise, it was contended, it was open for the Tribunal to permit additional ground as per Supreme Court decision in the case of National Thermal Power Corporation Ltd. v. CIT (1998) 229 ITR 383 (SC). Referring to the Commentary by Mr.
Palkhiwala at pp. 1521 and 1525 (8th Edition), it was submitted that a new question could be raised in respect of a ground taken in the grounds of appeal particularly when Rule 8 of the ITAT Rules, specified that grounds had to be set out without arguments. As regards the decision in 74 ITD 332 (sic), it was submitted that there was a series of transactions in that case which was not so in the present appeal.
Moreover, the said decision was contrary to the Gujarat High Court decision in Banyan & Berry v. CIT (1996) 222 ITR 831 (Guj). Mr. Dastur reiterated his reliance on the decisions of several Benches of the Tribunal with particular emphasis on the decision of the Ahmedabad Bench in the case of Paramount Pollution Control Ltd in (ITA No. 365 (Ahd) of 1994 dt. 6th Oct., 1999).
13. We have given our due, careful and thoughtful consideration to the elaborate arguments of both the parties the material on record and a host of authorities cited before us. At the outset, we may clarify that, as held by the Mumbai Bench of the Tribunal in the case of Berlia Chemicals & Traders (P) Ltd. (ITA No. 7510 (Bom.) of 1993 dt. 25th Oct., 1999) [reported at (2002) 76 TTJ (Mumbai) 974--Ed.] since Expln.
4A to Section 43(1) was brought into effect from 1st Oct., 1996, the present transaction will not fall within the purview of said Expln. 4A.It has also been held by the Tribunal in the case of Berlia Chemicals & Traders (P) Ltd. (supra) that the said Expln. 4A is not retrospective in operation. Mr. Rajendra has rested his arguments mainly on the plea that the transaction was a colourable device to avoid tax. This has also been the main reason given by the authorities below. Hence, let us examine the issue in the light of the decision in McDowell & Co. Ltd. 's case (supra).
14. Supreme Court, in McDowell & Co. Ltd.'s case (supra) discussed at length various Indian and English decisions. In final conclusion, the Court said (at p. 160) : "In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, not whether the transaction is not unreal and not prohibited by the statute, but whether the taxation is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it".
The effect of McDowell & Co. Ltd.'s case (supra) was discussed at length by the Gujarat High Court in the case of Banyan and Berry v. CIT (supra). After noting the above conclusion, the High Court observed that in McDowell & Co. Ltd.'s case (supra) on the factual aspect, Supreme Court was considering a case where in a going business a liability to pay duty which was, legally of the assessee and which on such payment was to become part of its cost of commodity sold by it and to become part of its selling price to the buyers, was as a result of arrangement between the seller and buyer split into two, namely, duty so far paid separately directly to the Tax authorities and the balance so paid to the seller. The arrangement was existing solely for the purpose of not paying the tax and it is not a transaction in reality of receiving a lower price than the one on which it was marketing (Underlined, italicised in print, by us). The Court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy of genuineness of the Act. The High Court further observed that the facts and circumstances which lead to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.
15. Let us examine the facts of the present case on the bedrock of the above principles. Can it be said that assessee brought and leased back the asset to Bombay Dyeing solely for the purpose of avoiding tax In our opinion, the reply to this question has to be in the negative, mainly on account of two reasons. Firstly, assessee is earning rental income from the transaction which is subjected to tax even till today.
If it was not a bona fide business transaction, assessee, after claiming benefit of depreciation in one year, would not have subjected itself to tax on the income arising from that very transaction. If it is argued on behalf of the Revenue that at least in the year under consideration assessee reaped the benefit of depreciation, then it can be said on behalf of the assessee that the benefit is more than offset by the tax it has paid on the rental income over a period of eighteen years. As an extension of this argument if the Revenue says that whereas assessee took the benefit of depreciation in one year but staggered its tax liability over thirteen years, then perhaps as observed by Gujarat High Court in the case of Banyan and Berry's (supra), every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, will be viewed with suspicion and be treated as a device for avoidance of tax, irrespective of legitimacy or genuineness of the Act.
This, we emphatically state, is not intended by the decision McDowell & Co. Ltd. 's case (supra). In any case, considering the overall impact of the transaction spread over a number of years, it cannot be said that the arrangement has resulted in the reduction in tax liability of the assessee, it is merely incidental and a natural fallout of a genuine business transaction. As to how it is a genuine business transaction, we shall advert to it a little later. But till we are on the aspect of reduction of the tax liability, we may refer to the decision of the Mumbai Bench of the Tribunal in the case of Berlia Chemicals & Traders (P) Ltd. (ITA No. 7510/Bom/1993, dt. 25th Oct., 1999) to which both of us are a party.
16. While dealing with this aspect in the said case, Tribunal observed that while striking a business deal, tax aspect will always be considered, because it directly affects the fund flow and cash flow situation of the business. Tax aspect is very much an integral part of the business decision which should not be looked down as a taboo, If tax aspect is not taken into consideration, it is quite unbusiness like for the businessman to do. As long as it is a genuine business transaction, any reduction in tax liability arising therefrom cannot automatically attract the label of a colourable device. This brings us to the second reason as to why it cannot be said that the transaction is solely for the purpose of avoiding tax.
17. Undisputedly, this is not the only lease rental income earned by the assessee. Right from the assessment year under consideration till date, assessee has earned lease rental income over and above that received from Bombay Dyeing. The fact that assessee had earned lease income from others also, proves that it has genuinely entered into leasing business. If it is argued that assesses has shown lease income from others merely to add colour to the transaction, such argument has to be dismissed forthwith on grounds of utter absurdity. Of course, it is not ascertainable from the records whether the entire lease income is from sale and lease back arrangement, but that is not at all material. The material on record unequivocally establish that assessee has genuinely entered into leasing business. Even if the rest of the leasing income is from simple lease it does not matter because Mr.
Rajendra, the learned Departmental Representative himself had said that per se there is nothing illegal about sale and lease back transaction.
According to him, this particular transaction was a colourable device.
We have already dismissed earlier that it is not a colourable device and now having established that assessee is genuinely in leasing business, the transaction cannot fall within the purview of McDowell & Co. Ltd. 's case (supra).
18. It is quite interesting to note as far as the benefit claimed by the assessee in the form of depreciation is concerned, Department treats the transaction as sham, but not so when it comes to taxing income arising from the same transaction. In this regard also, Tribunal has described such treatment to be unfair in the case of Berlia Chemicals & Traders (P) Ltd. (supra). Our observations in that case apply with equal force in this case as well.
19. Both the authorities below have observed that the entire project of DMT plant was of nearly Rs. 100 crores. According to them it was strange that Bombay Dyeing could bear about 98 per cent of the cost of project, and for 2 per cent it had to enter into such an arrangement particularly when there was no evidence to show that for 2 per cent Bombay Dyeing had financial constraints. This argument has no basis at all. There is no material to suggest that Bombay Dyeing itself must have borne the cost of project to the extent of 98 per cent. It may have borrowed funds from various sources, the sale and lease back arrangement with the assessee being one of them. It is also fallacious to say that a businessman would resort to borrowing only when he faces financial stringency. We do not wish to give lessons in financial management, but suffice it to say that prudent deployment of funds at his disposal by the businessman may also entail borrowing irrespective of the quantum of borrowing and the form of borrowings. Thus, this argument has no basis.
20. Nothing much turns out of the argument that assessee had acted ultra vires its memorandum of association. The AO himself mentions that even if alteration of memorandum is debatable and even if we do not concern ourselves with the violation of Companies Act, the entire transaction is in the nature of a dubious for planning. Thus, though having discussed the issue at length, ultimately AO rested his conclusion more on the alleged dubious character of the transaction and not on alleged violation of Companies Act. Otherwise also, AO's conclusion in this respect is based on a factual error. According to him the memorandum was altered on 23rd March, 1984, whereas commissioning of the boiler was also completed around the same time, i.e., by March, 1984. It is on record that the boiler was installed in September, 1984, and the lease agreement was also entered into in September, 1984, i.e., after the memorandum of association was altered.
Thus, nothing really turns out of this allegation.
21. To sum up, if it is a genuine business transaction, the same should not be characterized as a colourable device merely because it results in reduction of tax liability. Whether a particular transaction is a genuine business transaction or not, has to be gathered from the facts and circumstances of each case. In case of sale and lease back transactions, the same would generally be treated as sham if there is a finding that the asset shown to be leased out does not actually exist, or where it is found that the same asset is leased out to more than one lessee at the same point ,of time. If these findings are not there, and if other related factors are not found to be abnormal, then perhaps, there is little scope to apply the ratio of McDowell's case (supra).
22. In the case before us, we have not found any aspect of the transaction to be of dubious nature and hence it is directed that assessee be granted depreciation on the leased boiler as claimed by it.
23. Next issue which is in ground No. 4 in the grounds of appeal is against holding that Tanzanian income is taxable in India. Details filed with the AO revealed that assessee had earned income from Tanzania amounting to Rs. 15,80,857. Assessee claimed exemption in respect of this income by relying on art, 7 of the Double Taxation Avoidance Agreement (DTAA) between India and Tanzania. AO referred to Article 7(2) of the agreement and was of the view that when an enterprise conducts similar business activity as that done in other Contracting State and it has a permanent establishment in that Contracting State then the profits of such activities may be attributed to the permanent establishment. AO observed that assessee had been earning income in Tanzania by way of sale of tea. It conducted similar business in India and assessee had its head office in India. Through its head office it had been controlling the activities in India. Thus, according to the AO, income earned by the assessee in Tanzania was attributable to the permanent establishment in Tanzania and hence such income was taxable as business profits earned in India.
24. CIT(A) upheld the action of the AO without any discussion except adding that in earlier year assessee itself had shown loss arising in Tanzania and was taken into consideration for computing total income.
25. Mr. Dastur referred to Article 7(1) of the DTAA and submitted that since the branch of the assessee-company i.e., the permanent establishment is in Tanzania, profits arising therefrom will be taxed in Tanzania only and not in India. It was submitted that the assessee-company was an enterprise of India and reference was made to Article 3(g) of the DTAA also. Reliance was placed on the decision of the Madras High Court in CIT v. V.R.EM. Ramaswamy Chettiar (1995) 211 ITR 368 (Mad). Mr. Rajendra strongly supported the orders of the lower authorities.
26. We have considered the rival contentions and perused the material on record. We have also perused the DTAA between India and Tanzania.
For immediate reference, we reproduce below Article 7(1) of the DTAA. 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment.
For our purpose, "enterprise of the Contracting State" referred to in the above article is the assessee before us. The expression "that Contracting State", therefore, for our context is India.
Consequentially, the expression "other Contracting State" will be Tanzania. Having clarified this much, let us dissect the article.
Article 7(1) has two parts as follows : (A) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carried on business in the other Contracting State through a permanent establishment situated therein.
(B) If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment.
(i) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State.
(ii) The enterprise carries on business in the other Contracting State through a permanent establishment situated therein.
Limb (i) of Part A would mean that profits of the assessee shall be taxed only in India. However, limb (ii), because it is connected with limb (i) by the word "unless", indicates that since assessee has a permanent establishment (PE for short) in Tanzania, profits of the assessee shall not be taxed only in India but also in Tanzania. Part B then goes to indicate that only so much of the profits will be taxed in Tanzania as is attributable to the PE in Tanzania.
27. Having reached the above conclusion, let us now refer to Article 7(2) of the DTAA on which the Department has relied. The said article which is reproduced below, goes on to specify as to what profits can be attributed to the activities of the PE : If an enterprise of a Contracting State, which has a permanent establishment in the other Contracting State, sells goods or merchandise of the same or similar kind as those sold by the permanent establishment or renders services of the same or similar kind as those rendered by the permanent establishment, the profits of such activities may be attributed to the permanent establishment unless the enterprise proves that such sales or services are not attributable to the activity of the permanent establishment.
The above article clearly indicates that if the assessee carried on the same activities as are carried out by the PE, the profits of such activities may be attributed to the PE. It is for the assessee to prove that its activities are not attributable to the activity of the PE.Reading Article 7(1) and 7(2) also makes it clear that profits of a PE can be taxed in both the countries.
28. Now, we come to Article 7(3) which is as follows and which strengthens our view: Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is incapable of determination or the ascertainment thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on a reasonable basis.
Above article makes it clear that if the assessee in India carries on business in Tanzania through a PE, then the profits of the PE shall be attributed both in India and Tanzania, if the PE is engaged in the same activities as the assessee. This intention is expressed by the expression "....There shall in each Contracting State be attributed to that permanent establishment the profits...." Thus Article 7(3) makes it clear that the profits of the PE shall be taxed in both the States.
Article 7(3) further provides that where determination of profits attributable to a PE present exceptional difficulties, the same may be estimated on a reasonable basis.
29. Our view that profits of the PE in Tanzania are taxable in India gets further strengthened by reading Article 7(4) which is reproduced below: Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in para (3) shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this article.
The above article clarifies that if it is customary for the Contracting State (India in our case) to determine profits attributable to a PE on the basis of total profits of the enterprise (the assessee in our case), then nothing in Article 7(3) shall preclude the Contracting State (India in our case) from determining the profits to be taxed by such an apportionment. This clearly indicates that India can and has to tax the profits of the Tanzanian PE in India.
30. The argument of Mr. Dastur was that this would result in double taxation of the same profits which would be against the very purpose and spirit of DTAA. We cannot agree with this argument because, DTAA itself provides for the mechanism to eliminate double taxation. Art. 25 of DTAA provides for granting credit against Indian tax where tax has been paid in both the countries. Assessee itself has admitted of this position. It is the uncontroverted finding of the CIT(A) that in the earlier year assessee had taken into consideration the loss from Tanzanian PE while computing its income. When queried, it was submitted by Mr. Dastur that what the Department does most of the time, assesses has done it this time that is, taking the "Heads I win, tails you lose" stand. We are more than convinced that the Tanzanian income is rightly included in the total income. It may also be noted that corrective measures have been taken by the Tribunals and Courts whenever it has come to their notice of any party having adopted the "Head I win, tail you lose" stand.
31. While arriving at the conclusion we have arrived at, we have kept in view the basic principles of double tax avoidance while interpreting the Tanzanian Treaty. The basic principles are as follows : (a) The country of residence (in our case India) has a basic right to tax global income of the resident assessee.
(b) Country of source (Tanzania in our case) shall also levy tax.
However, generally it will levy lower than normal tax, so that there is some scope left for the country of residence also to levy tax.
(c) Country of source does not give credit for taxes paid in the country of residence.
There are two methods of eliminating double tax, viz., (i) Credit method and (ii) Exemption method. India generally follows the credit method and the same has been followed in the Tanzanian Treaty so far as business income is concerned. Thus, if there is a PE situated in the country of source, that country can levy tax on the income earned by PE. At the same time country of residence will also levy tax on the profits earned by the PE and will give credit for taxes paid in the country of source. In view of the foregoing discussion, this ground of assessee is rejected.
32. Ground No. 5 in against disallowance of Rs. 25,68,323 being payment made to American Cyanamid Co., USA, as capital expenditure. In the alternative, in ground No. 6 assessee has claimed depreciation and investment allowance on the impugned amount. Assessee had entered into an agreement with the aforesaid American company on 2nd Aug., 1983. By virtue of this agreement, American company was to provide expertise, skill, know how and technical data to the assessee-company for the manufacture of various types of laminates and other industrial products. Several payments were made by the assessee to the American company under the agreement. One such payment was of Rs. 25,68,323 made on 13th Oct., 1983. This was claimed as revenue expenditure by the assessee. Considering the various terms of the agreement, AO was of the view that the expenditure had resulted in bringing into production new types of machines and that the know-how was to become the property at the assessee. Further, by acquiring a new-process, assessee had acquired an enduring benefit. Accordingly, relying on the decisions in Mysore Kirloskar Ltd v. CIT (1968) 67 ITR 23 (Mys), CIT v. Service Station Equipment (P) Ltd (1981) 132 ITR 130 (Bom), Assam Bengal Cement Co. Ltd v. CIT (1955) 27 ITR 34 (SC) and Pingle Industries Ltd. v. CTT (1960) 40 ITR 67 (SC). AO held the expenditure to be of capital in nature and disallowed the deduction claimed by the assessee.
33. CIT(A) referred to certain clauses in the agreement dt. 2nd Aug, 1983, and held that the benefit accrued to the assessee was of enduring nature and hence expenditure was rightly treated as capital expenditure.
34. Mr. Dastur referred to the preamble and to the various clauses of the agreement. It was contended that assessee was already in possession of a technology which required updation. The updated technology was mainly aimed at reduction and control of heat requirement, upgrading of existing equipment and general cost production. Reference was made to the order of the Tribunal in assessee's case for asst. yr. 1984-85 in ITR No. 2334/Bom/1988, dt. 18th July, 1994, wherein the Tribunal had rejected the claim for deduction of this very amount on the ground that liability was not incurred in that year. Hence, it was contended that the deduction be allowed this year. For the argument that it is revenue expenditure reliance was placed on the decisions in the case of Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC), CIT v. Wavin (India) Ltd. (1999) 236 ITR 544 (SC). Asstt. CIT v. Buckau Wolf New India Engg. Works Ltd. (1986) 157 ITR 751 (Bom), Bajaj Tempo Ltd. v.CIT (1994) 207 ITR 1017 (Bom) and CIT v. Kirloskar Tractors Ltd. (1998) 231 ITR 849 (Bom).
35. The learned Departmental Representative strongly relied on the order of the AO wherein, it was submitted, there was a detailed discussion. As regards alternative claim for depreciation, it was contended that no such ground was taken before the CIT(A) and hence there was no question of entertaining it at this stage.
36. We have duly considered the rival contentions. In asst. yr. 1984-85 this very claim of the assessee was denied on the ground that liability had not accrued as technology was not supplied in that year. Tribunal did not examine as to whether the eligibility was of capital nature or revenue nature. This year it is not in dispute that the technology has been supplied, and hence liability has accrued to the assessee. The only dispute is with regard to the nature of liability, i.e., whether it is capital or revenue. Let us examine the same, 37. In the case of Wavin (India) Ltd. (supra), assessee had incurred expenditure to obtain the benefit of R&D made by a foreign company.
Technical information given to the assessee was "non-exclusive" and "non-transferable". In other words, it was not an out and out sale of know-how. It was only non-exclusive and non-transferable right of user.
Supreme Court held that the expenditure was not for acquisition of any asset at all and hence was of revenue nature.
38. In the present case, Clause 5 of the agreement states that the cyanamid technology (which assessee acquired) shall be for the exclusive use of Bombay Burmah in India, except for the right of cyanamid and/or its subsidiaries and affiliates to make, sell and use the products in India using cyanamid technology. The clause clearly indicates that the cyanamid technology can be made available to the other affiliates of cyanamid also, and hence, to that extent the right of user for the assessee is not absolutely exclusive. In other words, assessee has a non-exclusive right of user. Again in this case also assessee is not acquiring any asset at all.
39. Next, we consider the case of Bajaj Tempo Ltd. (supra). In this case, gear boxes were earlier supplied by a German company to the assessee for its 3 wheeler tempos. Assessee deciding to manufacture the gear boxes itself, was in need of know-how. The same was acquired from the German company by way of designs, data sheets and such other technical documents. Bombay High Court allowed deduction as revenue expenditure on the ground that state-of-the art technology of modern times is neither permanent nor enduring. The same principle would apply to the facts of the case before us.
40. Similar was the decision of the Bombay High Court in the case of Kirloskar Tractors Ltd (supra) wherein it was held that the expenditure in question related to the carrying on of the business of the assessee and was an integral part of it's profit-making process, and hence, was allowed as revenue expenditure.
41. In the present case also the technology is acquired merely for updation purposes. Clause 1(d) of the agreement lists out various areas which will be affected by the new technology. The areas are confined to the various process of production which indicate that the technology will enable the assessee to carry out its business more profitably. It also needs to be appreciated that in this age of fast advancing technology, it is difficult to say that the technology acquired by the assessee would be enduring. Moreover, no new asset is acquired by the assessee. Hence, considering all these factors and considering the principles laid down in the decisions cited by the learned counsel, we direct that assessee be allowed deduction of Rs. 25,68,323 as revenue expenditure. Since we have allowed ground No. 5 raised by the assessee, ground No. 6 relating to allowance of depreciation on the above amount does not survive.
42. Ground No. 7 is against disallowance of bad debts of Rs. 17,536.
Assessee claimed deduction of the impugned amount as bad debt. The said amount included the following.
AO was of the view that assessee was still in the process of correspondence with the respective parties and hence they cannot be considered as bad debts. Accordingly, he added back the sum of Rs. 16,356 CIT(A) confirmed the disallowance.
43. The contention of Mr. Dastur is that there are small left-over amounts and the cost of suit will exceed the amounts recoverable.
Moreover, till date there is no recovery. The contention of the learned Departmental Representative is that it should not be a convenient judgment of the assessee about the recoverability of the aforesaid amounts but must be an objective one. Reliance is placed on the decision of the Calcutta High Court in the case of CIT v. Coates of India Ltd. (1998) 232 ITR 324 (Cal).
44. On due consideration of the matter, we are of the view that assessee be allowed deduction as claimed since the amounts involved are really small and do not deserve any concerted effort on the part of the assessee to run after its recovery. Keeping in view the smallness of the amounts and business realities, deletion of disallowance of Rs. 16,356 is directed.
45. Ground No. 8 is against disallowance of Rs. 1,30,840 under Section 37(3) of the Act, being expenditure on shade cards which are samples of Formica sheets. AO disallowed the impugned expenditure as advertisement publicity and sales promotion expenditure. CIT(A) confirmed the same.
We need not detain ourselves for long on this issue and direct that deduction of Rs. 1,30,840 be allowed to the assessee. Samples of shade cards are not distributed to any one as a sales promotion compaign.
They are meant for customers to select the shade of the laminate. In fact, it is a service to the customer and does not entail any son of publicity or advertisement, leave aside extravaganza on advertisement.
The ground is accordingly allowed.
46. Ground No. 9 is against disallowance of entrance fee of Rs. 45,000 paid to Willmgdon Club and Rs. 1,643 paid to Bombay Cricket Association under Section 37(2A) as entertainment expenditure. AO disallowed the expenditure and CIT(A) confirmed the disallowance without any discussion. The contention of Mr. Dastur is that no entertainment is involved in payment of entrance fees. Mr. Rajendra relied on the orders of the lower authorities. We direct the allowance of the expenditure as membership of the clubs is essentially meant for developing business contacts and hence it is a business expenditure. Accordingly, the ground is allowed.
47. Ground No. 10 is against treating Rs. 90,000 as perquisite for use of motor car for computation of disallowance under Section 40A(5). In its return of income, for India (Tea) disallowance under Section 40A(5) was considered at Rs. 34,891 and for India (others) at Rs. 1,27,931.
Following the stand taken in earlier years, AO treated 25 per cent of the total expenses on cars to executives as perquisite value.
Accordingly, a sum of Rs. 56,000 + Rs. 34,000 was also considered for disallowance under Section 40A(5) of the Act. CIT(A) confirmed the action of the AO following the appellate orders in earlier years.
48. Mr. Dastur has relied on the decision of the Mumbai (sic-Bombay) High Court in the case of Geoffrey Manners & Co. Ltd. v. CIT (1996) 221 ITR 695 (Bom). It is contended that an amount of Rs. 450 p.m is recovered from each employee. Any rent recovered from the employee goes to reduce the perquisite value and hence no disallowance is called for.
Mr. Rajendra has relied on the order of the Tribunal for asst. yr.
1984-85 in ITA No. 2334/Bom/1988 dt. 18th July, 1994.
49. We have perused the order of the Tribunal for asst. yr. 1984-85. It appears that this issue has been restored to the file of the AO with certain directions by the Tribunal in asst. yrs. 1982-83 and 1983-84.
Following these orders, for asst. yr. 1984-85 also Tribunal set aside the order to the file of the AO with a direction to redetermine the issue keeping in mind the directions given by the Tribunal in earlier years. It is not brought to our notice as to whether the issue has been redetermined or not consequent upon setting it aside by the Tribunal in any of the earlier years. Thus, the issue appears to be resting with the AO for redetermination in the immediate three preceding years with certain directions given by the Tribunal. As to what were the directions given by the Tribunal is neither ascertainable from the order of the Tribunal for asst. yr. 1984-85, nor are we apprised of the directions in any manner by either side. Consistency, as far as possible, has to be maintained, particularly when Tribunal has given certain directions in the earlier years. Hence, for this year also, the issue is set aside with a direction to the AO to redetermine the issue keeping in mind the directions given by the Tribunal for asst. yrs.
1982-83 and 1983-84. It is emphatically stated that the AO take up this issue without further delay so that finality is attained thereby avoiding unnecessary litigation. It is also directed that while deciding the issue, AO shall keep in mind the decision in the case of Geoffrey Manners (supra) and give the assessee due opportunity of being heard.
50. Ground No. 11 is against disallowance of Rs. 3,21,535 being the amount of unpaid sales-tax. Since assessee has been given deduction of the said amount in the next year, this ground is not pressed and hence the same is rejected as such.
51. Ground No. 12 is against disallowance of depreciation in respect of flat at Poona. During the year assessee purchased three flats in Pune for a consideration of Rs. 12,69,030. Details revealed that flat had been purchased for the residence of executive of the company. Two of the said flats had been allotted to the executives but one remained vacant throughout the accounting period. Relying on the decision of the Gujarat High Court in the case of CIT v. Suhrid Geigy Ltd. (1982) 133 ITR 884 (Guj). AO was of the view that as regards buildings there must be actual evidence and real user in the commercial sense and there must be an immediate nexus between the user and the business. Accordingly, depreciation on two flats was allowed but depreciation on the third flat amounting to Rs. 21,150 was disallowed CIT(A) upheld the disallowance without any discussion.
52. Mr. Dastur submitted that the third flat was a transit house and hence it might have remained vacant during the year. Since it is a transit house, it has to be kept ready for use and hence depreciation should be allowed. Mr. Rajendra relied on the orders of the lower authorities and also on the decision in the case of CIT v. Ocean Gamers (P) Ltd. (1995) 211 ITR 357 (Bom).
53. On due consideration of the matter we are of the view that whereas the decision relied upon by Mr. Rajendra is not relevant to our facts, nonetheless, disallowance of depreciation is upheld. The contention that the third flat is a transit house is not borne out from any material on record. There is also no evidence to show that this plea was at all taken before the lower authorities. Hence, disallowance of Rs. 21,150 is sustained.
54. Last ground in the appeal is against disallowance under Rule 6D.Assessee had claimed deduction on combined trip basis per individual.
AO computed the disallownace on per trip basis, it is fairly concealed on behalf of the assessee that issue has since been decided against the assessee by the jurisdictional High Court in the case of CIT v. Acrow India Ltd. (1998) 229 ITR 325 (Bom). Thus, the ground of the assessee is rejected.
56. First ground in the Departmental appeal is against deletion of disallowance of Rs. 86,960 being ex gratia payment made to the employees. As admitted by the AO in his order, impugned payment was not covered under the Payment of Bonus Act and Section 36(1)(ii) of the Act. Nonetheless, disallowance was made on the ground that the payment was in excess of the amount allowable under Payment of Bonus Act and was not a statutory liability.
57. CIT(A) observed that the payment was made to those employees who did not qualify for bonus under the Payment of Bonus Act. Deduction was allowed on the ground that the same was reasonable and was covered by the second proviso to Section 36(1)(ii), and alternative, the same was allowable under Section 37 also.
58. Mr. Rajendra relied on the order of the AO whereas Mr. Dastur relied on the order of the CIT(A) and also stated that such payment has always been allowed in the past. ' 59. We uphold the order of the CIT(A) allowing the deduction. When by AO's own admission, the payment is not under the Payment of Bonus Act, there is no question of disallowing the same under Section 36(1)(ii).
In any event, the payment is wholly and exclusively made for the purpose of business and is allowable as a business deduction. Thus, the ground of the Revenue is rejected.
60. Next ground is against deletion of disallowance of Rs. 4,176 and Rs. 2,69,950 being commission and special discount paid respectively under Section 37(3A) of the Act. Rs. 4,176 was commission paid in liquidating a particular product Rs. 2,69,950 was a special discount as an incentive on sales performance paid to parties. AO disallowed both the payments under Section 37(3A) as expenses for advertisement, publicity and sales promotion.
61. CIT(A) observed that advertisement and sales promotion expenses would ordinarily apply to expenditure incurred prior to effecting sales and the impugned expenditure would fall into category of expenses incurred after sales. Therefore, AO was directed to allow the deduction.
62. In asst. yr. 1984-85, Tribunal allowed similar deduction by relying on the decision of Calcutta High Court in the case of CIT v. Hindustan Motors Ltd. (1991) 192 ITR 619 (Cal) and on the decision in the case of CIT v. The Statesman Ltd. (1992) 198 ITR 582(Cal). Respectfully following the aforesaid decisions, we uphold the order of the CIT(A) allowing the deduction.
63. Last ground in the Departmental appeal is against deletion of disallowance of Rs. 4,21,919 incurred towards motor car repairs from the computation of disallowance under Section 37(3A). AO disallowed the impugned amount as expenses incurred on "running and maintenance" of motor cars. CIT(A) allowed the deduction on the ground that the deduction was allowable under Section 31 and hence not disallowable under Section 37(3B)(ii). He also relied on Tribunal's decision in Telco's case (citation not given). This issue has been decided in favour of the assessee by the Tribunal in its own case for asst. yr.
1984-85 vide its order cited supra following the decision of the Mumbai High Court in the case of Chase Bright Steels Ltd. (1989) 177 ITR 124 (Bom). Respectfully following the earlier order of the Tribunal we uphold the order of the CIT(A) on this ground also.
65. Summarizing the result of this order, the appeal of the assessee is partly allowed and that of the Department stands dismissed.