1. Since common issues are involved in these three appeals, two by the assessee and one by the Revenue, the same are consolidated and disposed of by a single order for the sake of convenience.
2. In the assessee's appeal relating to the assessment year 1989-90 and in the Revenue's appeal relating to the assessment year 1990-91, the first common issue relates to disallowance of technical know-how fees paid to Bierrum and Partners Ltd., U.K., for acquiring modern construction technology used in construction of natural draught cooling towers. In the assessee's appeal (I.T.A. No. 841/PN of 1995) relating to the assessment year 1990-91, the first grievance relates to upholding of disallowance of Rs. 8,19,644 towards engineering services paid to the same M/s. Bierrum and Partners Ltd., U.K.3. The assessee is a registered firm engaged in the business of construction of various types of R. C tall structures, such as natural draught cooling towers, storage silos, chimney stacks and similar structures and other structural engineering. The business is being carried on for a number of years. The construction of tall structures like chimney stacks and cooling towers require scaffolding for the purpose of construction. When these tall structures are constructed, a big scaffolding is required to be erected with the help of which high rise construction is being carried out. The assessee-firm entered into foreign collaboration with an English firm called Bierrum and Partners Ltd. by an agreement dated August 18, 1988. The foreign collaborator, shortly referred as Bierrum, had developed advanced methods of construction techniques and systems. They had particularly developed and got patented a system called "Bierrum System" which contains latest technical know-how for construction systems and techniques suitable for tall R.C structures such as draught cooling towers for electricity power stations, chimney stacks, storage silos and other structures. A copy of the agreement has been placed on record at pages 10 to 29 of the paper book. Few clauses of the technical collaboration agreement may be noted.
4. Clause 1.1 states that commencement of the use of Bierrum System will mean and include receiving drawings for Bierrum Systems, fabrication by the assessee of the necessary equipment for use of Bierrum System as per the design and drawing supplied by Bierrum and use of Bierrum System and equipment for five consequent lifts on the first natural draught cooling tower by the assessee. Clause 1.3 specifies that Bierrum System shall mean a construction system as a whole for RCC tall structures for various purposes specified in the clause. Clause 1.4 defines Bierrum know-how to mean and refer to confidential proprietary information, data specifications, methods of manufacturing and other technical expertise relating to manufacturing and use of Bierrum System the contents whereof are specified in the said clause. Clause 1.5 defines engineering services to mean and include services required for making use of Bierrum System through Bierrum know-how for construction of various structures as per the requirement of the assessee including supervising charges in India by competent on-site staff required by the asses-see to train its staff in successful operation of the Bierrum System.
5. Clause 2.1 provides that Bierrum grant to the assessee an exclusive licence and sole rights for Bierrum System and Bierrum know-how with a right to the assessee to use in the territory. Clause 3.1.2 provides that Bierrum shall give complete information, drawings and details with respect to Bierrum System incorporating Bierrum know-how in five sets in English language. The sets of documents are to be made available at the request of the assessee, cost of which has to be borne by the assessee at actuals. Clause 3.2 provides that on being requested, Bierrums shall carry out and provide detailed engineering services to the assessee for use of the Bierrums System for different structures.
Clause 4.1 states that Bierrums have obtained patent rights in the following countries, i.e., U. K., Spain and Australia, and will apply for such rights in India. Clause 4.4 provides that if Bierrums make any further development or improvement in the Bierrums System, the Bierrum shall furnish to the assessee necessary technical data relating to such improvement or development.
6. Article 5 is in regard to consideration and terms of payment. There are two types of payments envisaged in the agreement. Clause 5.1 refers to lump sum amount of 30,000 subject to tax as per Indian laws in four instalments ; the first instalment of 32.5 per cent, within 30 days from the effective date, 32.5 per cent, within 30 days from Bierrums transferring, delivering and imparting to the assessee Bierrums System and Bierrum know-how. 30 per cent, within 30 days after commencement of use of Bierrums Systems and balance 5 per cent, within 30 days on successful completion of first natural draught cooling tower shell and removal of the construction system. (This lump sum payment is subject-matter of dispute in the assessment year 1989-90 in the assessee's appeal and in the assessment year 1990-91 in Department's appeal). As per clause 5.2, in addition to lump-sum payment the assessee is required to pay for engineering service 30,000 for the first natural draught cooling tower shell. Out of the above, 20 per cent, is payable within 30 days of the commencement of construction, 40 per cent, within 30 days of completion of 50 per cent, work of tower shell and 40 per cent, within 30 days of completion of tower shell for which Bierrums System is put to use. For the construction of the second and subsequent cooling towers, the assessee is required to pay 20,000 in instalments mentioned as above. There are other payments to be made on different accounts, but for the purposes of the appeal, they are not relevant. Clause 6.2 provides that the assessee will use its best efforts to prevent duplication or disclosure of Bierrums technical documentation and shall not surrender to third parties without prior written approval of Bierrums. The obligations of secrecy as provided in the agreement shall not apply to such technical documentation which is already in public domain at the time of receipt thereof or after receipt thereof it has become part of the public domain through no fault of the assessee.
7. Clause 6.3 provides that the agreement shall come into force from the effective date and shall remain in force for a period of eight years and continue thereafter until terminated by either party giving one year's notice. Clause 6.5 provides for rights of the parties to terminate the agreement by notice in writing. These are when the parties fail to observe any of the terms of the agreement or when the parties become insolvent or either of the parties are dissolved or wound up. Clause 6.5.1 provides Bierrums have right to terminate the agreement if the assessee does not use the Bierrums System or actively pursue the cooling tower construction market in the territory for continuous period of 365 days. Clause 6.6 provides that in the event of this agreement which expires by effluxation of time or is lawfully terminated by the assessee, the assessee shall be entitled to continue to use Bierrums System and Bierrums know-how without further payment to Bierrums. On the other hand, if Bierrums terminate the agreement, the licence granted by Bierrums to the assessee under the agreement shall stand terminated and the assessee shall not make further use of Bierrums System and Bierrums know-how and return the same to Bierrums provided that the same has not become knowledge of public domain.
8. During the assessment year 1989-90, the assessee paid to Bierrums out of its lump sum payment 19,500 equivalent to Rs. 5,24,274. This amount was claimed by the assessee as revenue expenditure. According to the Assessing Officer, the Income-tax Act has provided separate Section 35AB for treating expenditure on account of technical know-how fees.
According to this section, the amounts spent under the head has to be allowed in six equal instalments starting from the year in which it was incurred. In response to the Assessing Officer's intention to disallow 5/6ths of the amount claimed, it was claimed by the assessee's representative that Section 35AB was not applicable in the assessee's case. According to the assessee, it was a civil contractor and not manufacturer of any article or thing. The know-how was being used for reducing the cost of construction of cooling towers and the provisions of Section 35AB had no application. This contention of the assessee was, however, turned down by the Assessing Officer by holding that earlier to the introduction of the section, there was a dispute between the assessees and the Department as to whether such expenses are capital or revenue. There being considerable conflict of opinion, Section 35AB was introduced with effect from April 1, 1986, and it is under Section 35AB that all technical know-how fees are governed. He further held that in the context of industrial company, the definition of the term as per Finance Act, 1984, manufacture or processing of goods is treated at par with execution of projects. Because of this analogy, the assessee's business of execution of projects was held by the Assessing Officer to be in the nature of manufacturing or processing of goods and, therefore, according to him, Section 35AB applied. In view of this, the Assessing Officer allowed 1/6th of Rs. 5,24,274 and balance amount was to be allowed in five subsequent years as against full deduction of Rs. 5,24,274. He, therefore, made a disallowance of Rs. 4,36,895.
9. The disallowance was challenged by the assessee before the learned Commissioner of Income-tax (Appeals) who agreed with the findings of the Assessing Officer and held that the disallowance was rightly made under Section 35AB. The same point arose in the assessment year 1990-91. In that year, the assessee claimed Rs. 2,82,307 out of lump sum payment. The Assessing Officer, however, allowed only 1/6th thereof, i.e., Rs. 47,060. He also allowed 1/6th of the last year's payment, i.e., Rs. 87,379. The disallowance made in this year was also challenged in the appeal before the learned Commissioner of Income-tax (Appeals). The matter was considered by the same Commissioner of Income-tax (Appeals), who had dealt with the issue in the assessment year 1989-90. In this year, however, the learned Commissioner of Income-tax (Appeals) agreed with the contention of the assessee. The issue was dealt with by him in para, 8 of his order for the assessment year 1990-91. He held that according to Section 35AB , know-how means any industrial information or techniques likely to assist in the manufacture or processing of goods or in the working of mine, oil well or other resources of mineral deposits. Where the assessee was not carrying on any of the activities contemplated under Section 35AB, the provisions of Section 35AB would not apply. In the instant case, he held that the business of the assessee being that of a civil contractor, ratio of the decision of the Supreme Court in the case of CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412 will apply and the expression manufacture or produce used in Section 35AB will not include construction of structures. He further held that the definition of industrial company as given in the Finance Act, 1984, has the word manufacture or produce is to be considered in the context of Section 35AB of the Act. Since the assessee was not a manufacturer, Section 35AB was not applicable. According to him, consideration of Rs. 2,82,307 was paid by the assessee for supply of Bierrums Systems. The system made available under the contract was one which would help the assessee in carrying out its business efficiently. The system so made available had a limited life and consideration of Rs. 2,82,307 can be treated as revenue expenses. He further held that in the age of advancement of scientific knowledge there is no permanence of systems and hence disallowance of lump sum consideration of Rs. 2,82,307 was not correct. According to him, the Assessing Officer had allowed only 1/6th of the expenses, but he held that the entire amount of Rs. 2,82,307 was allowable as revenue expenditure and, therefore, addition of Rs. 2,35,247 was deleted.
10. It will be seen from the above that in regard to the lump sum payment, the learned Commissioner of Income-tax (Appeals) came to diametrically opposite conclusion probably because of the subsequent pronouncement by the Supreme Court in the case of CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412 that the expression manufacture or processing will not include construction activity. This finding of the learned Commissioner of Income-tax (Appeals) in the assessment year 1990-91 is challenged by the Revenue in its appeal.
11. In the assessment year 1990-91, there was an additional point regarding payment of Rs. 8,19,640 paid by the assessee towards engineering services under the same agreement. As has been noted with reference to the terms of the agreement, the assessee was required to pay engineering service fees to the foreign collaborator as soon as construction of first cooling tower was undertaken. These fees are paid by the assessee to the collaborator for enabling it to understand and operate the Bierrums System of construction to enable it to construct cooling tower. This amount was claimed by the assessee as revenue expenditure. According to the Assessing Officer, this was not a lump-sum payment and, therefore, the provisions of Section 35AB were not applicable, but according to him, this did not prevent the Department from examining whether the expenditure was of capital or revenue nature. In this regard, the assessee had claimed before the Assessing Officer that in view of the decision of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377, the expenditure incurred on obtaining know-how should be allowed.
According to the Assessing Officer, the facts of the assessee's case were distinguishable from those before the Supreme Court. According to him, it was the decision of the Supreme Court in the case of Scientific Engineering House (P.) Ltd. v. CIT [1986] 157 ITR 86 which applied to the facts and he held that the amount of Rs. 8,19,364 was to be treated as capital expenditure on which the assessee was held to be entitled to claim depreciation. He, therefore, disallowed the amount of Rs. 8,19,364 but at the same time allowed depreciation of Rs. 2,73,121 on the said amount.
12. This issue was also challenged by the assessee in appeal before the learned Commissioner of Income-tax (Appeals) and this has been dealt with by the Commissioner of Income-tax (Appeals) in para. 9 of his order. Contrary to his finding in regard to the lump-sum payment to the same foreign collaborator, the learned Commissioner of Income-tax (Appeals) held in the context of expenditure of Rs. 8,19,364 that the said expenditure provided a benefit of enduring nature to the assessee.
According to him, the nature of services rendered under this clause were not the same as for providing Bierrums System which was referred in earlier para, of the collaboration agreement. According to the learned Commissioner of Income-tax (Appeals), there was a degree of permanence and endurability in the technical know-how derived by the assessee. The assessee had relied on before the Commissioner of Income-tax (Appeals) on the decision of the Bombay High Court in the case of CIT v. Kirloskar Cummins Ltd. [1993] 202 ITR 36 as also another decision of the Bombay High Court in the case of CIT v. Tata Engineering and Locomotive Co. (P.) Ltd. [1980] 123 ITR 538. The Commissioner of Income-tax (Appeals), however, held that the facts in the assessee's case are distinguishable from those in both the above decisions of the Bombay High Court. He, therefore, held that the addition of Rs. 8,19,364 had been properly made. It is against this disallowance confirmed by the Commissioner of Income-tax (Appeals) that the assessee is in appeal for the assessment year 1990-91.
13. The issue regarding deduction on account of lump-sum payment involved in the assessment years 1989-90 and 1990-91 and deduction of engineering fees for the assessment year 1990-91 arise from the same technical know-how agreement. According to Shri K.A. Sathe, learned counsel for the assessee, the same considerations apply in regard to the allowability of the expenditure and the learned Commissioner of Income-tax (Appeals) was not justified in taking conflicting stands on the same issue in two different years. He further stated that the Commissioner of Income-tax (Appeals) finding in regard to the allowability of lump-sum payment as revenue expenditure and that Section 35AB did not apply to the facts of the case was a correct conclusion for the assessment year 1990-91 and the same logic and reasoning also should have been applied for the assessment year 1989-90. He further submitted that the nature and character of technical service fees paid in the assessment year 1990-91 were in the nature of revenue expenditure and the reasons which the learned Commissioner of Income-tax (Appeals) considered in allowing lump sum payment in the assessment year 1990-91 should have equally applied to the payment of engineering service fees of Rs. 8,19,964.
14. In regard to the allowability of expenditure incurred by the assessee for the use of technical know-how from Bierrums, Shri Sathe submitted that it was not correct on the part of the Assessing Officer to hold that Section 35AB was intended to get over the conflict between the Department and the asses-sees in regard to the question whether the payment made under technical know-how was a revenue expenditure or capital expenditure. In this regard, he drew our attention to the Circular of the Board No. 421, dated June 12, 1985 (see [1985] 156 ITR (St.) 130), reproduced on page 1842 of Chaturvedi and Pithisaria (volume 1, 5th edition). In this circular, it has been stated that with a view to providing further encouragement for indigenous scientific research, the Finance Act, 1985, has inserted new Section 35AB in the Income-tax Act. The section provides that any lump-sum consideration paid by the taxpayer for acquiring any know-how for use for the purpose of his business will be allowed as deduction by spreading it over six years, etc. In this circular, there is no reference whatsoever to dispute between the assessees and the Department in regard to the question whether expenditure of acquiring technical know-how is revenue or capital expenditure. The question whether in a given case the payment made under technical collaboration constitutes revenue expenditure or capital expenditure will have to depend on the terms and conditions of the collaboration agreement, as also on the other facts of the case, such as whether the know-how has been obtained for the purpose of improvement of the production techniques or for facilitating existing business or whether the technical know-how is obtained for starting manufacture of altogether new item of manufacturing. The position whether depreciation is allowable on the amounts paid towards acquisition of know-how when such acquisition was considered to be capital expenditure was a matter of dispute and the Department was contending that such capital expenditure would not be eligible for the purpose of depreciation. According to learned counsel, it is really to resolve this controversy that Section 35AB has been introduced providing amortization of the expenditure incurred for acquiring technical know-how. According to Shri Sathe, the expression lump sum payment for acquiring know-how is important and suggests that the question should be in the nature of capital expenditure. If, on the other hand, technical know-how is obtained for its use in existing business, such a payment would not be for acquiring know-how and would be outside the purview of Section 35AB. Thus, according to Shri Sathe, expenditure incurred in relation to technical know-how will have to be considered as revenue or capital on the basis of the terms of the agreement and on the basis of voluminous case law on the point and Section 35AB cannot be conclusive of the matter.
15. Shri Sathe specifically mentioned that in the assessee's case in particular Section 35AB had no application, because the said section refers to know-how required for the purpose of assisting manufacturing or processing of goods or in working of a mine or oil well or other resources of mineral deposits. The assessee's business of structural engineering and construction cannot be considered to be manufacturing or processing of goods in view of the decision of the Supreme Court in the case of CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412. The question of allowability of the expenditure on account of lump sum payment as also for the engineering service fees has, therefore, to be considered in the present case without reference to Section 35AB.16. On the issue whether payments made under the technical collaboration fees by way of lump-sum payment or by engineering services constitute revenue expenditure or not, Shri Sathe submitted that in the present case it was very clear from the facts on record that the assessee was already in the business of construction of high-rise structures. The know-how which was obtained was in regard to assembling and erecting scaffolding for the purpose of high-rise structures which know-how enabled the assessee to carry out construction of high-rise structures within a shorter time and at a lesser cost. In other words, the know-how was intended to improve the techniques of construction and in that sense the entire expenditure was in the revenue field. In support of his contentions, he relied upon the following judgments : (ii) CIT v. Tata Engineering and locomotive Co. P. Ltd. [1980] 123 ITR 538 (Bom); (iii) Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC); (vi) CIT v. Bhai Sunder Dass and Sons P. Ltd. [1986] 158 ITR 195 (Delhi); 17. Shri K. Srinivasan, the learned Departmental Representative supported the action of the Assessing Officer for both the years.
According to him, while the learned Commissioner of Income-tax (Appeals) was justified in the assessment year 1989-90 in upholding the decision of the Assessing Officer on the point, he was not justified in deleting the addition for the assessment year 1990-91 for which the Revenue is in appeal. According to him, Section 35AB is meant to cover all the cases of technical collaboration and the question now cannot be decided otherwise than on the basis provided under Section 35AB.According to him, the purpose of the section was to resolve the long standing controversy between the assessees and the Department whether such expenditure in acquiring know-how was capital or revenue.
According to the learned Departmental Representative there is no scope for holding that Section 35AB has only limited application in cases where the assessee had acquired know-how and the expenditure is considered as capital as contended by Shri Sathe. According to him, the question whether the expenditure involved is revenue or capital cannot be decided as per the whims of the assessee and there is no scope for any interpretation of Section 35AB as has been sought to be done by the assessee's representative. He, however, did not specifically deal with the finding of the learned Commissioner of Income-tax (Appeals) that the provisions of Section 35AB were not applicable in view of the fact that the assessee was not engaged in the business of manufacturing of goods. The finding of the Commissioner of Income-tax (Appeals) was based on the decision of the Supreme Court in the case of N.C.Budharaja and Co. [1993] 204 ITR 412. The learned Departmental Representative further pointed out that in the case of the assessee, technical know-how obtained by the assessee constituted acquisition of enduring advantage and the amount paid either as lump-sum payment or as engineering service fees was not allowable as revenue expenditure.
According to him, the disallowance as confirmed by the Commissioner of Income-tax (Appeals) for the assessment year 1990-91 of engineering service fees of Rs. 8,19,364 was justified and the assessee's appeal on this issue requires to be rejected.
18. In support of his contentions that the payment for obtaining technical know-how constituted capital expenditure, the learned Departmental Representative relied on the decision of the Madras High Court in CIT v. W.S. Insulators of India Ltd. [2000] 243 ITR 348. The said decision of the Madras High Court follows the decision of the Supreme Court in the case of CIT v. I.A.E.C. (Pumps) Ltd. [1998] 232 ITR 316 as also the decision in Jonas Woodhead and Sons India Ltd. v.CIT [1997] 224 ITR 342 (SC). According to the learned Departmental Representative, the Madras High Court has also considered the decision of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v.CIT [1989] 177 ITR 377. The learned Departmental Representative also referred to the decision of the Supreme Court in the case of CIT v.Warner Hindustan Ltd. [1999] 239 ITR 566 and the decision of the Bombay High Court in CIT v. Sudarshan Chemical Industries (P.) Ltd. [1986] 159 ITR 629 wherein the Bombay High Court had held that only 4/5ths of the expenditure in obtaining technical information and know-how was allowable, while l/5th of the expenditure was considered to be capital expenditure.
19. We have considered the rival submissions. After taking into consideration the facts and circumstances of the case, the contents of the collaboration agreement, salient features of which have been reproduced supra in paras 4 to 7 (pages 21 to 23) and the detailed submissions of learned counsel, we are of the considered opinion that in the assessee's case in particular Section 35AB has no application, because the said section refers to know-how required for the purpose of assisting manufacturing or processing of goods or in working of a mine or oil well or other resources of mineral deposits. The assessee's business of structural engineering and construction cannot be considered to be manufacturing or processing of goods in view of the decision of the Supreme Court in the case of CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412 relied upon by the learned Commissioner of Income-tax (Appeals) while adjudicating upon the issue in the assessment year 1990-91. In the assessment year 1989-90 when the Commissioner of Income-tax (Appeals) decided the appeal, the decision of the Supreme Court in the case of N.C. Budharaja and Co. [1993] 204 ITR 412 was not available, but when he considered the same in the subsequent assessment year 1990-91, the above case from the Supreme Court was available and he rightly applied the ratio of the same to the facts of the case of the assessee. We accordingly hold that the case of the assessee stands squarely covered by the decision of the hon'ble Supreme Court in the case of N.C. Budharaja and Co. [1993] 204 ITR 412 and accordingly allow the assessee's ground No. 1 in the assessment year 1989-90 and direct the Assessing Officer to allow the entire amount of Rs. 5,24,474 being technical know-how fees paid to M/s.
Bierrums. For the same reasons, we dismiss the ground raised by the Revenue in the assessment year 1990-91 where the Commissioner of Income-tax (Appeals) has rightly treated the amount of Rs. 2,82,307 as revenue expenditure.
20. Now, coming to the payment made under the technical collaboration fees by way of lump sum payment or by engineering services amounting to Rs. 8,19,364 constitute revenue expenditure or not, we find that in the present case it was clear from the facts on record that the assessee was already in the business of construction of high-rise structures.
The know-how which was obtained was in regard to assembling and erecting scaffolding for the purpose of high-rise structures which know-how enabled the assessee to carry out construction of high-rise structures within a shorter time and at a lesser cost. In other words, the know-how was intended to improve the techniques of construction.
The terms of the technical collaboration agreement have been noted earlier and as per Clause 2.1 Bierrums had given the assessee an exclusive licence and rights for Bierrums System and Bierrums know-how to use in the concerned territory. But the patent and the ownership rights over the know-how remained with Bierrums as it clear from Clauses 4.1 to 4.4 of the collaboration agreement. Thus, the assessee had acquired a right to use the technical know-how during the period of agreement and such right cannot be considered to be an acquisition of know-how as in the sense of acquiring property in the know-how.
Moreover, the purpose of the agreement was to facilitate the assessee's business to be carried on more efficiently by saving cost and time and there was no acquisition of any asset as such. Similarly, if there was any enduring advantage in the sense that such advantage was available to the assessee for a period of the agreement, such advantage was in revenue field in the sense that such advantage was not adding to the profit-making apparatus, but only to make the carrying on of the business more efficiently and profitably. The tests laid down in this behalf by the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 may be noted. In this case, it was held by the hon'ble Supreme Court that the expenditure even if incurred for obtaining an advantage of enduring benefit may, none the less, be on revenue account, and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. In our considered opinion, it is this test laid down by the apex court which has to be applied in the present case. It is a known fact that in the days of rapid technological advances, technical know-how does not remain an enduring advantage and over a period of time becomes obsolete. It is further noted that the engineering service fees paid by the assessee for the assessment year 1990-91 was to be paid after construction of first high-rise structure as per Clause 5.2.
Engineering service has been detailed in Clause 3.2 of the collaboration agreement according to which Bierrums are required to provide different engineering services to the assessee for use of the system on the construction of natural draught towers or similar structures. Thus, it is entirely for providing engineering services that the payment is to be made by the assessee to Bierrums.
Accordingly, in our opinion, the engineering services fee paid also was clearly in the nature of revenue expenditure.
21. In CIT v. Tata Engineering and Locomotive Co. P, ltd, [1980] 123 ITR 538, the Bombay High Court held that technical know-how cannot be called a tangible asset. Technical know-how and technical advice for the time being cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The length of the period of agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset. Merely because an assessee who has entered into a contract with regard to know-how is entitled to know-how even after the agreement has expired, it does not mean that he has acquired a benefit of an enduring nature. An agreement of foreign collaboration where foreign know-how is availed of in lieu of payment, is in substance a transaction of acquiring the necessary technical information with regard to the technique of production. Instead of employing persons having knowledge of techniques and utilising their knowledge technical know-how is acquired. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent. In regard to the agreement of TELCO with Daimler Benz for acquiring technical knowledge regarding methods of production and for use of trade name, it was held by the hon'ble High Court that there was no acquisition of asset or advantage of enduring nature. The amounts paid for provisions of know-how and licence to use the trade name were revenue expenditure.
22. In Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC), the assessee was engaged in the manufacturing of antibiotics, including penicillin. The assessee entered into collaboration agreement for acquiring know-how to produce higher yield and sub-culture of high-yielding strain of penicillin. There was no evidence to indicate that this was not in the line of existing manufacture of penicillin. In these circumstances also a lump sum payment once for all was held to be not capital in nature and was considered to be a revenue expenditure.
During the course of hearing before us, in answer to a specific query from the Judicial Member as to why lump-sum payment could not be considered to be a capital expenditure, learned counsel submitted that the above decision of the hon'ble Supreme Court is a clear authority that lump-sum payment or payment once for all and payment of enduring benefit are not conclusive test. Learned counsel referred to the headnote of the judgment and submitted that the Court had held that the idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions ; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must need be flexible so as to respond to the changing economic realities of business. We find that this decision of the hon'ble Supreme Court follows the principles laid down in the case of Empire Jute Co. Ltd. [1980] 124 ITR 1 (SC).
23. In CIT v. Indian Oxygen Ltd. [1996] 218 ITR 337 (SC), the assessee had made a payment to a British Company under collaboration agreement.
Under the agreement, the assessee was not entitled to use information, process or inventions of the British company after termination of the agreement. The Indian company was prohibited from disclosing this information, process and invention during the currency and also after the determination of the agreement in view of Clause 11. Though the agreement was for a period of ten years, it could be terminated earlier. Therefore, it was held that it could not be said that the Indian company had incurred expenditure for the purpose of bringing into existence of any asset or advantage of enduring nature. The expenditure was incurred by the Indian company for running its business or working it with a view to produce profits. This decision of the High Court was confirmed by the Supreme Court.
24. Coming to the arguments of the learned Departmental Representative we find that the reliance placed by him on the various decisions is of no assistance to the Revenue, because the same are distinguishable on facts. In the decision of the Madras High Court in CIT v. W.S.Insulators of India Ltd. [2000] 243 ITR 348, the assessee was to acquire information and drawings for setting up a new plant with a completely new product. In the assessee's case, the assessee was already in the business of structural engineering and all that it obtained was by way of improvement in the existing system of construction which enabled the assessee to save cost and time in the construction of high-rise structures. In the decision before the Madras High Court this distinction has been brought out in bold detail. The decision of the Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd. [1997] 224 ITR 342 also was a case where the assessee obtained technical know-how for setting up a manufacturing unit of all types of springs and suspension. This distinction that technical know-how for entirely new product is capital or revenue was also considered by the Bombay High Court in the case of Sudarshan Chemical Industries P. Ltd. [1986] 159 ITR 629 which has followed the decision of the same High Court in the case of Tata Engineering and Locomotive Co. (P.) Ltd. [1980] 123 ITR 538. We, accordingly, hold that the contentions of the learned Departmental Representative are not at all tenable and the expenditure incurred by the assessee both by way of lump sum payment as well as by way of engineering service fees deserve to be allowed.
25. In the light of above discussion, we hold that the lump-sum payments of Rs. 5,24,274 in the assessment year 1989-90 and of Rs. 2,82,307 in the assessment year 1990-91 are allowable as revenue expenditure. For similar reasons, engineering service fees paid under the same agreement of Rs. 8,19,364 are also allowable as revenue expenditure in the assessment year 1990-91. Since the Assessing Officer has allowed depreciation of Rs. 2,73,121 as he treated the amount as capital expenditure, he is directed to withdraw the same.
26. The next common grievance in the assessee's appeals for the assessment years 1989-90 as well as 1990-91 relates to deduction under Section 32AB and the reasons for the disallowance are the same. In the assessment year 1989-90, the assessee had claimed deduction under Section 32AB of Rs. 2,40,592. The auditor's report in Form No. 3AA had been obtained. The assessee had computed net amount of profit of Rs. 12,02,963. It had purchased plant and machinery worth Rs. 5,22,000.
Deduction was claimed at the rate of 20 per cent, of the net amount of Rs. 12,02,963. During the course of the assessment, the Assessing Officer noticed that the assessee had earned interest on fixed deposits in various deposits with companies and dividend from Unit Trust of India. The assessee had also incurred expenses on interest on borrowings from banks and private parties. It had set off income from interest and dividend of Rs. 9,03,605 against total expenses of interest of Rs. 10,69,436 and net amount of Rs. 1,65,831 was debited in the profit and loss account. The assessee had submitted before the Assessing Officer that fixed deposits in the banks were made for the purposes of business for allowing overdraft facilities and bank guarantees. Investments of company deposits were for short-term period.
The income from these investments including dividend income was claimed to be business income and, therefore, the amounts were contended to be correctly included for the purpose of computing deduction under Section 32AB. According to the Assessing Officer, deduction under Section 32AB was to be restricted to the income of the assessee from eligible business. Income from interest on fixed deposits and interest from dividend are to be computed under the head "Income from other sources" and, therefore, these receipts are to be excluded while computing deduction under Section 32AB because they are not the profits of eligible business. He, therefore, confined the deduction under Section 32AB to the extent of Rs. 2,04,240 as against Rs. 2,40,592. For the assessment year 1990-91 for the same reasons the assessee's claim under Section 32AB was restricted to Rs. 1,87,870 which was computed at the rate of 20 per cent, on the profits of the business of Rs. 9,39,348.
The assessee had claimed deduction under Section 32AB at Rs. 2,15,353.
27. On appeal, the learned Commissioner of Income-tax (Appeals) confirmed the disallowances for both the years upholding the findings of the Assessing Officer.
28. Shri K.A. Sathe, learned counsel for the assessee, submitted that the issue is covered by the decision of this Tribunal, in the case of CIT v. Maharashtra Scooters Ltd. (I.T.A. No. 519/Pune of 1991), dated February 3, 1995, for the assessment year 1988-89. Reference filed by the Department on the point was also rejected in R.A. No. 55/PN of 1995, decided on July 3, 1995. Learned counsel further submitted that the issue was also covered by the decision of the Cochin Bench in the case of Apollo Tyres Ltd. v. Deputy CIT [1992] 43 ITD 464. Learned counsel further relied upon the following judgments : (i) Deputy CIT v. G.L. Rexroth Industries Ltd. [1999] 105 Taxman 111 (Ahd) (Mag) ; (ii) Asst. CIT v. Brij Bhushanlal and Sons [2000] 69 TTJ 379 (Delhi); (iv) Eveready Industries (India) Ltd. v. Deputy CIT [2001] 78 ITD 175 (Cal).
29. Shri K. Srinivasan, the learned Departmental Representative relied on the decisions of the Assessing Officer as well as the Commissioner of Income-tax (Appeals) for both the years, i.e., 1989-90 and 1990-91.
According to him, the definition of profits of eligible business is on the same lines as those under section 115J. Relying on the reasoning given by the hon'ble Supreme Court in the case of Surana Steels Pvt.
Ltd. v. Dy. CIT [1999] 237 ITR 777, the learned Departmental Representative pleaded that the expression profits of the business has to be construed in the sense in which it is understood under the Income-tax Act and the concept of Companies Act cannot be imported. He submitted that the provisions of computation of profits of eligible business are necessary provisions and they have to be interpreted reasonably. He, thus, supported partial disallowance of the assessee's claim under Section 32AB.30. We have considered the rival submissions and perused the facts on record. We agree with the learned counsel that the issue is covered by the decision of this Bench in the case of Maharashtra Scooters Ltd. (supra) where the reference filed by the Department has also been rejected. In this case, the Tribunal has held that provisions of Sub-section (3) of Section 32AB read with Part II of the Sixth Schedule and also as clarified by the Board's Circular No. 461, dated July 9, 1986 (see [1986] 161 ITR (St.) 17), clearly showed that the assessee had correctly computed the eligible profits by including therein dividend income from UTI. The issue also stands supported by the decision of the Cochin Bench in the case of Apollo Tyres Ltd. v. Deputy CIT [1992] 43 ITD 464 (Cochin), In this case, under Section 32AB deduction was to be made with reference to income computed under the head "Profits and gains of business or profession" as is clear from the language of the first part of Sub-section (1) of Section 32AB, but when it came to the limits of deduction, it was limited to 20 per cent of the profits of the eligible business, as computed in the accounts of the assessee audited in accordance with Sub-section (5). Here, the computation was not under the head "Profits and gains of the business", but as per Parts II and III of Schedule VI to the Companies Act as adjusted as per the provisions of Section 32AB(3). Thus, for arriving at a deduction of 20 per cent, profit was not to be computed as per the provisions of the Income-tax Act, but it was to be computed as per the provisions of Parts II and III of the Sixth Schedule to the Companies Act. Reference may be made to item (xi) under Clause 3 of Part II whereunder profits of the business include the amount of income from investments, which are to be distinguished between trade investments and other investments. Income by way of interest is also included.
Thus, as per the provisions of the Companies Act, Parts II and III of the Sixth Schedule, computation itself provided inclusion of interest on investments. The distinction which the Income-tax Act makes between computation under the head "Profits and gains of the business" and income from other sources is absent as far as Section 32AB(1)(ii) is concerned. The case of the assessee also stands supported by the Central Board of Direct Taxes Circular No. 461, dated July 9, 1986 (see [1986] 161 ITR (St.) 17), which clearly specified that profits of the eligible business are to be computed as per the provisions of the Companies Act. The other cases relied upon by learned counsel also support the view taken by this Tribunal in the case of Maharashtra Scooters Ltd. (supra).
31. Now, coming to the submissions of the learned Departmental Representative we find that the decision of the Supreme Court in the case of Surana Steels Pvt. Ltd. v. Deputy CIT [1999] 237 ITR 777 relied upon by the learned Departmental Representative in fact supports the case of the assessee. The Supreme Court has clearly held that in interpreting the taxing statute if there was any inclusion of provision of another statute, the provision must be understood in the sense in which it was considered under the statute from which it was taken and for this reason, computation of profit has to be made as understood under the Companies Act. Accordingly, we do not find any merit in the contentions of the learned Departmental Representative These grounds are accordingly allowed.
32. In the assessee's appeal relating to the assessment year 1989-90 (I.T.A. No. 214/PN of 1994), there is yet another ground which reads as under : "The learned Commissioner of Income-tax (Appeals) erred in confirming disallowance of Rs. 1,88,934 being expenses on foreign education of Shri K.P. Vora who was an apprentice in the appellant firm and whose education is going to be of substantial benefit to the appellant's business. The addition may kindly be deleted." 33. During the course of assessment proceedings, the Assessing Officer noted that the assessee-firm had incurred expenses of Rs. 1,88,934 on the foreign education of Shri K.P. Vora. Details of these expenses are given on page 30 of the paper book. Air ticket expenses are of Rs. 6,850, while rest of the expenses are on tuition fees paid. Shri K.P.Vora is the nephew of Shri Jayantilal P. Vora, a partner of the firm.
It was stated before the Assessing Officer that Shri Krunal P. Vora was a student with bright academic record. He obtained his Bachelor degree in Engineering in 1988 and thereafter, he was sent to the U.S.A. for higher education in structural engineering (Master of Science). After completion of his degree in May, 1988, Shri K.P. Vora was stated to have joined the firm as an apprentice for a few months, but no payment was made to him during the period. He was sent to U.S.A. from where he obtained degree in M.S. in Civil Engineering in May, 1989. His major subject was structural engineering in the University of California, Berkeley. He worked in U.S.A. for some period and joined the assessee-firm on his return from abroad. The details of salary paid to Shri K.P. Vora have been given on page 31 of the paper book. It is seen that he was working with the assessee-firm up to 1999 or so and afterwards he is stated to have joined the firm as a partner. According to the assessee, Shri K.P. Vora was required to join the assessee-firm after completion of the education and his higher education in the field of structural engineering which was in the line of the assessee's business would have been useful to the assessee's activity. In view of this, it was contended before the Assessing Officer that the expenditure was wholly and exclusively for the purpose of business of the assessee. The Assessing Officer however, did not accept the contentions of the assessee as according to him Shri K.P. Vora was not an employee of the firm and even though it is stated that he joined the firm as an apprentice no expenses on account of salary or stipend were incurred. The assessee-firm had not provided any of his employees or their wards any such concession of bearing the expenses on such higher education. The facility of providing higher education to the employee or his ward was not followed by the assessee-firm, but only in the case of Shri K.P. Vora such expenses were borne by the assessee. According to the Assessing Officer it was thus clear that the expenditure was incurred only because Shri Vora happened to be close relative of one of the partners. As regards the allowability of the expenditure, the Assessing Officer pointed out that there is no contract which bound Shri K.P. Vora and it was not certain whether after completing the studies he would join the assessee or not. Secondly, he held that though engineering is relatable to the assessee's business, the relationship is not intimate or direct and, therefore, there was no direct relation with the business of the assessee. According to him, therefore, the expenditure was incurred on a close relative of the partner and could not be considered to be wholly and exclusively for the purpose of the business.
34. On appeal, the learned Commissioner of Income-tax (Appeals) concurred with a view of the Assessing Officer. The assessee had relied on the decision of the Bombay High Court in the case of Sakal Papers Pvt. Ltd. v. CIT [1978] 114 ITR 256. According to the Commissioner of Income-tax (Appeals), this decision was distinguishable because in the present case the expenditure was incurred for an apprentice who is not an employee. The assessee had claimed before the Commissioner of Income-tax (Appeals) that the assessee had entered into an agreement or bond which bound Shri K.P. Vora to work at least for three years by way of service on return from foreign country (copy placed on page 24 of the paper book).
35. Shri K.A. Sathe, learned counsel for the assessee, submitted that Shri K.P. Vora was the most suitable candidate in the assessee's business and just because he happened to be a relative of one of the partners did not take away his credit in acquiring degrees abroad and in India. According to learned counsel, the fact that he was related to a partner was no disqualification. The assessee-firm was consisting of partners of close families and the business was run as a family business. The employees were selected not by giving advertisement, but through personal contacts. A firm like that of the assessee would prefer known persons to partners. If the question arises whether a candidate of similar qualification were to be considered by the assessee, the assessee would have naturally preferred a relative of the partner, because his family background was known. The fact that his services would be more useful to the firm could be taken into account and because of his relationship with the family he could be depended upon in providing the service to the assessee-firm. In case of a stranger, there will not be any question of his joining a competitor for more money.
36. Shri Sathe further submitted that the fact that nobody else was sent abroad could not affect the admissibility of the expenditure in any way. Negatively, it could be said that Shri G.N. Tambe was a partner and his two sons Shri Kedar and Shri Kalyan were partners and had joined the business, but they were not sent abroad for education.
This, according to learned counsel, showed that Shri K.P. Vora was not sent abroad because he was a relative, but was sent because he was expected to gain something in the business. Learned counsel drew our attention to the copy of the agreement as also permit from the Reserve Bank of India which was in the name of M/s. K.B. Mehta--the assessee and submitted that as per the agreement, Shri K.P. Vora was obliged to join the firm after completing education. He reiterated that the decision of the Bombay High Court in the case of Sakal Papers Pvt. Ltd. [1978] 114 ITR 256 fully supports the assessee's case.
37. The learned Departmental Representative entirely relied on the reasoning given by the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals). According to him, the expenditure was incurred only because Shri K.P. Vora was a close relative of one of the partners and there was no nexus between the said expenditure and the business of the assessee. He relied in this behalf on the decision of the Bombay High Court in the case of CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383.
38. We have considered the rival submissions and perused the facts on record. We find great force in the contentions of learned counsel for the assessee and hold that Shri K.P. Vora was the most suitable candidate in the assessee's business and just because he happened to be a relative of one of the partners did not take away his credit in acquiring degrees abroad and in India and the fact that he was related to a partner was no disqualification. The fact that nobody-else was sent abroad could not affect the admissibility of the expenditure in any way. Before proceeding to U.S.A., Shri K.P. Vora had obtained a degree in engineering and he was sent to the University of California, Berkeley, for getting post-graduate degree in structural engineering; he had entered into an agreement with the assessee-firm to serve it after coming from U.S.A. for three years ; he actually served the firm and later on also joined as a partner. Accordingly, we do not find any merit in the contention of the Assessing Officer that the degree in structural engineering only was of indirect benefit to the assessee because the assessee was not an ordinary contractor doing petty jobs, but was undertaking large contracts of structural engineering. A degree obtained by Shri K.P. Vora in structural engineering abroad could be of immense help to the assessee's business. In our opinion the judgment of the Bombay High Court in the case of Sakal Papers Pvt. Ltd. [1978] 114 ITR 256 fully supports the case of the assessee. In the case of Sakal Papers Pvt. Ltd. [1978] 114 ITR 256 (Bom), Miss Leela Parulekar was a daughter of a director. She had a degree in English, whereas the assessee was publishing a Marathi newspaper. Her foreign training was in journalism and the Revenue's contention was the same as in the present case that her degree would not have helped the assessee's business and moreover her relationship with the directors also was considered in disallowing the expenditure. The Bombay High Court held that the relationship between the directors and the trainee concerned will confer assurance on the scrutinizing mind as far as possible the result of the training will be utilised for the benefit of the company.
It was further held that the disallowance on account of close relationship of the trainee with the directors was not sustainable and it was also held that the expenditure was allowable. It was also held that the formal contract or bond was not required. The above decision of the Bombay High Court was followed by the Bombay Bench of the Tribunal in the case of Trikaya Grey Advertisement India Ltd. v. Deputy CIT (I.T.A. No. 941/Bom of 1993 dated April 7, 1999, reported in B.C.A.J. February, 2001 --page 1070). In our opinion, the case of the assessee is on stronger footing and the expenditure should have been allowed as an allowable expenditure.
39. Coming to the reliance placed by the learned Departmental Representative on the judgment of the Bombay High Court in the case of Hindustan Hosiery Industries [1994] 209 ITR 383, we find that the facts are distinguishable. In this case before the Bombay High Court, the assessee was a firm consisting of family of mother and her four sons carrying on the business of manufacture of nylon socks and underwears.
One of the sons, V, was sent to U.S.A. for higher studies and at the same time he was taken as a partner. He obtained degree in business management. It was held by the Bombay High Court that the expenditure incurred for training of V could not be allowed as a business expenditure as there was found to be no nexus between the expenditure and business of the assessee. It is to be noted that the partner was sent abroad for degree in business management whereas in the assessee's case, Shri K.P. Vora was sent abroad for taking higher education in structural engineering and by no stretch of imagination, it could be said that there was no nexus whatsoever between such education and the business of the assessee.
40. In the light of the above discussion, we hold that there is no justification for disallowing the impugned expenditure of Rs. 1,88,934.
This ground acccordingly succeeds and is allowed.
41. In the result, the assessee's appeals are allowed and the Revenue's appeal is dismissed.
42. I have had an occasion to go through the proposed order passed by the learned Accountant Member but despite my best persuasion of myself, I have not been able to agree with ground No. 3 of the assessee's appeal for the assessment year 1989-90 (I.T.A. No. 214/PN of 1994) but on other grounds, I fully agree with the findings and conclusions as drawn by him and my reasons for being so are as under.
43. As regards ground No. 3, as far as details about the point at issue and the arguments of both the sides are concerned, those are appropriately recorded in the proposed order, so they are being repeated for the sake of brevity.
44. The question before the Tribunal is whether the expenditure of Rs. 1,88,934 on foreign education of Shri K.P. Vora, nephew of one of the partners, who was earlier not an employee of the assessee, as no salary has been paid and debited to the profit and loss account, and moreover, so-called agreement for serving with the assessee after achieving higher education in structural engineering for three years or double the period of stay abroad was executed even after the tickets for foreign trip was already purchased. The assessee has simply filed one bio-data without furnishing any copy of a degree or other relevant documents to establish that said Mr. K.P. Vora actually obtained the qualification/experience as indicated therein.
45. It is the case of the assessee that Shri K.P. Vora was the most suitable candidate in the assessee's business and just because he happened to be a relative of one of the partners did not take away his credit in acquiring degrees abroad and in India. The fact that he was related to a partner was no disqualification. The assessee-firm was consisting of partners of close families and the business was run as a family business. The employees were selected not by giving advertisement but through personal contacts. A firm like that of the assessee would prefer known persons to partners. If the question arise whether a candidate of similar qualification was to be considered by the assessee, the assessee would have naturally preferred a relative of the partner, because his family background was known. The fact that his services would be more useful to the firm could be taken into account and because of his relationship with the family he could be depended upon in providing the service to the assessee-firm. In case of a stranger, there will not be any question of his joining a competitor for more money. Learned counsel further submitted that the fact that nobody else was sent abroad could not affect the admissibility of the expenditure in any case. Negatively, it could be said that Shri G.N.Tambe was a partner and his two sons Shri Kedar and Shri Kalyan were partners and had joined the business, but they were not sent abroad for education. This showed that Shri K.P. Vora was not sent abroad because he was a relative, but was sent because he was expected to gain something in the business. As per the agreement and permit from the Reserve Bank of India in the name of the assessee, Shri K.P. Vora was obliged to join the firm after completing education.
46. It is the case of the Department that the expenditure was incurred only because Shri K.P. Vora was a close relative of one of the partners and nothing has been placed on record to show that there was any nexus between the said expenditure and the business of the assessee.
Moreover, prior to sending Shri K.P. Vora for foreign education he was not an employee of the assessee-firm and that is why no expenditure has been debited in the profit and loss account in this regard. The story of internship is also not supported by documentary evidence. Moreover, the details of his being available after having done his degree in engineering from Ahmedabad is also not made available on record. In order to cover and get benefit of the expenditure incurred on relative by one of the partners of the firm an agreement has been drawn in which said Shri K.P. Vora has been shown to be employee without salary for the period his being in abroad in the so-called agreement dated August 11, 1988, whereas expenditure on tickets, tuition fees, etc., at Rs. 6,850 and Rs. 77,498, respectively, had already been expended. So this appears to be just a cover. If he was specifically sent for getting further higher education for the benefit of the assessee, then as per bio-data, he has completed his Master's degree within a period of nine months and after that why did not he come back to join his so-called job with the assessee-firm and remained away up to October 1, 1993. So all these facts in the light of the Bombay High Court decision in the case of CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 does not support the case of the assessee. So the Assessing Officer has rightly disallowed such claim and the learned Commissioner of Income-tax (Appeals) is fully justified in confirming the action of the Assessing Officer. It was urged for further confirmation of the impugned order.
47. After hearing both the sides and considering the material on record and the case law cited, it is found from the record that no expenditure on account of salary to Mr. K.P. Vora, nephew of one of the partners of the assessee-firm, has been debited to the profit and loss account and there is no other evidence available to show that he was employee of the assessee-firm prior to leaving for education abroad. The so-called agreement dated August 11, 1988, makes mention about Mr. K.P. Vora being employee without salary who is purported to have undertaken to serve the assessee-firm for a period of three years or double the period for which he remains abroad on the expenses to be incurred by the assessee-firm. Similarly, situation arose before the Bombay High Court in the case of CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 when in a firm of mother and four sons, one of the sons was sent abroad for education in business management and just before sending him abroad, he was taken as a partner in the existing family firm and claimed expenditure on such foreign education of one of the partners but such claim was not allowed by the jurisdictional High Court wherein the facts and conclusions are as under (headnote) : "The assessee-firm was a family concern of a mother and her four sons (five partners) amongst whom V was one of the sons. The assessee-firm carried on business as manufacturer of nylon socks and underwear. During the previous year relevant to the assessment year 1976-77, V who was 21 years of age, was sent to the United States of America for higher studies and had obtained a degree in business management from an American University. The assessee-firm had taken V as a partner in the firm at the same time when V was sent for higher studies to the U.S.A. The assessee claimed that an expenditure of Rs. 60,678 incurred by it for the training of V be allowed as business expenditure. The Income-tax Officer rejected the claim of the assessee on the ground that the expenditure was of personal nature and not a business expenditure. The Commissioner of Income-tax (Appeals) affirmed the order of the Income-tax Officer on the ground that there was no nexus between the business of the assessee and the expenditure incurred. The Tribunal allowed the claim of the assessee. On a reference : Held, reversing the decision of the Tribunal, that the expenditure incurred by the assessee had no nexus with the business of the assessee and was not deductible as business expenditure." 48. Since the facts of the present case are on weaker footing than the facts before the Bombay High Court inasmuch as in the present case it is nephew of one of the partners whereas in the case before the Bombay High Court it is the family concern of mother and four sons, where one of the sons/brothers was taken as partner at the time of sending him abroad for higher education and claim was not allowed. So following the ratio of the jurisdictional High Court, which is a binding precedent and squarely covers the case of the assessee, therefore, the action of the authorities below in this regard is found to be justified and as such is confirmed. Hence, this ground of appeal of the assessee gets dismissed.
49. The Tribunal's decision as relied upon by the assessee's counsel is concerned, same loose importance in view of the jurisdictional High Court which is latest and covers the case of the assessee in hand, hence the same cannot be held to be applicable.
50. As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire : "Whether on the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) is justified in confirming disallowance of Rs. 1,88,934 being expenses on foreign education of Shri K.P. Vora ?" 51. As there is a difference of opinion between the members on the Bench, following point of difference is being referred to President for hearing on such point or for nominating the Third Member or to pass such orders as the President may deem fit and proper.
"Whether, on the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) is justified in confirming the disallowance of Rs. 1,88,934 being expenses on foreign education of Shri K.P. Vora, who was just taken as an employee without salary at the time of leaving for education abroad, in view of the Bombay High Court decision in CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 where, before sending abroad for foreign education, the son/brother of other partners was taken as a partner of the firm consisting of family members ?" 52. This appeal came before me as a Third Member to express my opinion on the following question : "Whether, on the facts and circumstances of the case the learned Commissioner of Income-tax (Appeals) is justified in confirming disallowance of Rs. 1,88,934 being expenses on foreign education of Shri K.P. Vora ?" 53. I have heard the rival submissions in the light of material placed before me and precedents relied upon. The assessee claimed an amount of Rs. 1,82,094 under the head "Staff trainee account" and a further amount of Rs. 6,850 under the head "Travelling expenses" incurred in respect of foreign education of Shri Krunal P. Vora. Shri Krunal P.Vora is the nephew of Shri Jayantilal P. Vora, a partner of the firm.
He was sent to U.S.A. for higher education in structural engineering.
The Assessing Officer held that these expenses were not incurred wholly and exclusively for the purposes of the assessee's business. As such, he disallowed the same. The Commissioner of Income-tax (Appeals) confirmed the disallowance.
54. I have perused the conflicting orders passed by the Tribunal. I have also examined the relevant documents and papers available on record. The asses-see did not file any evidence to buttress the "employer" and "employee" relationship. The only document which was placed before me by the assessee is articles of agreement, dated August 11, 1988, between M/s. K.B. Mehta, referred to as "employer" and Shri K.P. Vora, referred to as "employee". There is no evidence to support the fact that how they are employer and employee.
55. Shri G.S. Singh, learned Commissioner of Income-tax, Departmental Representative invited my attention on Clause 5 of this agreement. This clause stipulates that all sums paid and advanced to Shri K.P. Vora in connection with his studies shall constitute a debt owing to the employer and shall be recoverable by the employer from the employee with interest at the rate of 18 per cent per annum from the date of breach of any of the conditions. This clause is just compensatory.
There is no stipulation for any damages for the breach. My attention was also invited on the bio-data of Shri K.P. Vora. From the said bio-data it appears that he completed his M. S. in Civil Engineering in May, 1989. From August 1989, onwards he worked as design engineer with Morrison Knudsen Engineers, Inc. San Francisco, CA; immediately after completing the study, he did not come back to India to join the firm.
56. Shri K.A. Sathe, learned counsel for the assessee, submitted that Shri K.P. Vora obtained a degree of foreign University. He worked in U.S.A. to gain experience. There was a bona fide arrangement between the employer and the employee. The fact that the employee is related to the employer is not a material alliunde to which the claim can be disallowed. It was emphasised that the expenditure was incurred exclusively for the purposes of business. Reliance was placed on the decision of the jurisdictional High Court rendered in the case of Sakal Papers Pvt. Ltd. v. CIT [1978] 114 ITR 256 (Bom).
57. Shri G.S. Singh, learned Commissioner of Income-tax, Departmental Representative, heavily relied on the decision of the jurisdictional High Court rendered in the case of CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 (Bom) and the decision of the Madras High Court rendered in the case of M. Subramaniam Bros. v. CIT [2001] 250 ITR 769.
58. I now proceed to discuss the precedents relied upon. In the case of Sakal Papers Pvt. Ltd. v. CIT [1978] 114 ITR 256 (Bom), the assessee was a closely held company with two directors. It published a leading Marathi newspaper. The directors were husband and wife. Their daughter, who was a Master of Arts with English and French as special subjects, worked in the editorial department of the paper, starting as an apprentice, from September, 1955. She was sent to U.S.A. in 1960, for specialised education in journalism and business administration. The directors believed that it would be good for the progress of the paper.
She attended the Graduates' School of Journalism at Columbia University in New York and secured the degree of Master of Journalism and, thereafter, spent three months to obtain practical training in printing and lithography. On her return from U.S.A., she again joined the editorial department of the company and she was still working with the company. There was no agreement between her and the company binding her to serve the company for a specified period of years. The Assessing Officer disallowed the amount. The Appellate Assistant Commissioner confirmed the order of the Assessing Officer. The Tribunal found that the selection for training in U.S.A. of the daughter could not be attributed to any extra-commercial consideration and since the company had not taken any commitment about the service from the trainee, it had not behaved in a sensible or business like manner. As such, the disallowance was upheld. The High Court has held that merely because there was no commitment or contract or bond taken from the trainee, the expenditure which was otherwise proper, cannot be disallowed to the company, particularly when as a result of that expenditure the trainee had secured both a degree and training which could be of assistance to the asses-see-company and she had in fact served the company on her return to India. The factum of relationship itself would be an assurance that as far as possible, the result of the training would be utilised for the benefit of the company. Therefore, the expenditure incurred on the foreign education of the daughter was allowed.
59. I find that the facts of the present case are different from the facts of Sakal Papers Pvt. Ltd. [1978] 114 ITR 256 (Bom). In the present case the assessee could not establish that Shri K.P. Vora was the employee of the company. No evidence in this regard was ever adduced. From the bio-data of Shri K.P. Vora it is clear that he did not join the company soon after the completion of education. He joined some American firm after completing his education. It was not demonstrated that how the expenditure was incurred for the benefit of the business of the assessee.
60. In the case of CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 (Bom) the expenditure was incurred for sending to USA one of the partners of the assessee-firm, a manufacturer of nylon socks and underwear, for obtaining a degree in business management from an American university. The expenditure was held not allowable as business expenditure as there was no nexus between the expenditure and the business of the assessee-firm. Therefore, it is sine qua non that the assessee must establish the nexus between the expenditure and the business of the assessee-firm.
61. In the present case the assessee failed to establish any such nexus.
62. In the case of M. Subramaniam Bros. v. CIT [2001] 250 ITR 769 (Mad), the principle laid down by the jurisdictional High Court in the case of Hindustan Hosiery Industries [1994] 209 ITR 383 (Bom) was followed. The expenditure was held to be of personal nature, as such not allowable.
63. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. It is to be seen that whether the expenditure was incurred with the object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration. If the expense is found to bear an element other than the trade or business interest of the assessee, the expenditure is not allowable one.
64. Taking into consideration the entire conspectus of the case I am of the opinion that there was no nexus between the expenditure and the business of the assessee-firm. As such, I am inclined to agree with the view taken by the learned Judicial Member.
65. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.