ESCORTS EMPLOYEES ANCILLARIES LTD. vs. CIT HY.ROHTAK

Facts

The assessee, Escorts Employees Ancillaries Ltd., made payments for know-how in the previous years 1982-83 and 1983-84, relevant to assessment years 1983-84 and 1984-85. The assessee sought to claim a deduction under Section 35AB of the Income Tax Act, 1961, which came into effect from April 1, 1986. The dispute centers on whether the deduction, calculated as 1/6th of the payment, could be allowed for payments made prior to the effective date of the section. The Income Tax Appellate Tribunal (ITAT) had denied this deduction, leading to the present reference to the High Court.

Held

The High Court held that the ITAT was correct in law in denying the deduction under Section 35AB for payments made prior to April 1, 1986. The Court reasoned that Section 35AB(1) came into effect from April 1, 1986, and the amending Act did not provide for retrospective operation. Allowing the deduction for payments made before the enactment date would amount to giving retrospective effect to the provision, which was not intended. The Court found that the phrase "any previous year" should be interpreted to mean a previous year after the enactment of Section 35AB(1). The Court also distinguished the Gujarat High Court judgment relied upon by the assessee, stating it was inapplicable as it dealt with depreciation, not the applicability of a newly introduced section to prior payments. The Madras High Court judgment cited by the assessee was also deemed irrelevant as the expenditure in that case was incurred after the section came into force. Therefore, the question of law was answered in favour of the revenue.

Key Issues

1. Whether the ITAT was correct in law in holding that deduction under Section 35AB could not be allowed in respect of payments made prior to April 1, 1986, thereby denying a deduction of Rs. 1,26,944/- (being 1/6th of Rs. 7,61,666/-)? Assessee's Contentions: The assessee argued that while Section 35AB(1) came into force on April 1, 1986, its wording, including phrases like "any previous year" and "that previous year," indicates that it applies to previous years even where payments were made before April 1, 1986, provided the six-year period for deductions extends beyond April 1, 1986. The assessee relied on CIT v. Shri Vallabh Glass Works Limited (207 ITR 963) (Gujarat) to support this interpretation. Revenue's Contentions: The revenue contended that accepting the assessee's argument would give retrospective effect to Section 35AB(1), which was intended to operate prospectively from its enactment date of April 1, 1986. The revenue argued that the Tribunal had rightly rejected the assessee's claim.