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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ NEW DELHI
Before: SHRI G.D. AGRAWAL & SHRI SUDHANSHU SRIVASTAVA
per day basis. With respect to production facility management
fee, it was submitted that this also was paid under the service
agreement and was paid for management of production of seeds,
appointing of production facility manager for assisting in day to
day management, assistance in preparing production plans,
program tissue culture operations and recruitment of staff and
review use of technology, review processes and operations and
adoption of ensure best practices etc. It was submitted that this
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 fee was also linked to day to day production and was payable
annually in four equal instalments. The Ld. AR submitted that
this fee did not result in creation of any new capital asset and
was for services rendered in connection with operations and
production facilities and being so, they were purely revenue in
nature and were to be allowed as business deduction in the year
in which they were claimed. It was also submitted that there was
no concept of deferred revenue expenditure under the Act and
further these payments were accepted by the revenue as an
allowable deduction in assessment year 2001-02 initially u/s
143(3) of the Act and also in assessment year 2003-04. The Ld.
AR also submitted that in view of the judgment of the Hon’ble
Apex Court in the case of Taparia Tools Ltd. vs. JCIT reported in
372 ITR 605(SC), the impugned payments were allowable as
deduction in the year in which they were claimed/spent.
10.1 The Ld. AR also submitted that the grounds in
assessment year 2003-04 were identical to ground no. 5, 6, 7 & 8
in assessment year 2004-05, ground no. 4, 5, 6 and 7 in
assessment year 2005-06 and ground no. 3, 4, 5, 6 in
assessment year 2006-07 and the arguments would be identical
in all these years.
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 10.2 In response, the Ld. Sr. DR placed heavy reliance on
the orders of both the authorities below and vehemently argued
that the disallowance had been rightly made in this regard.
10.3 With respect to ground no. 7 in assessment year 2003-
04, the Ld. AR submitted that this ground challenged the action
of the Assessing Officer in capitalizing the expenses incurred on
loose tools. It was submitted that the lower authorities had failed
to appreciate that the loose tools were consumable in nature and
did not have a span of life which was more than one year. It was
also submitted that the assessee had also categorised loose tools
as part of inventory and not as capital assets in the books of
accounts and the accounting treatment had been approved by
the statutory auditors who had not made any adverse comments
on the same. It was prayed that the action of the Assessing
Officer in capitalizing the expenditure and allowing depreciation
@25% thereon deserves to be set aside.
10.4 The Ld. AR also submitted that this ground was also
identical to ground no. 4 in assessment year 2004-05, ground no.
2 in assessment year 2005-06 and the arguments would be
identical.
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 10.5 In response, the Ld. Sr. DR placed reliance on the
orders of the authorities below.
10.6 With respect to ground no. 3 in assessee’s appeal for
assessment year 2004-05 pertaining to disallowance relating to
upfront fee paid to ICICI Bank Ltd. in lieu of reducing the rate of
interest payable from 10.5% to 8.5%, the Ld. AR submitted that
the impugned upfront fee was allowable as a revenue expenditure
because there was no concept of deferred revenue expenditure in
the Income Tax Act and further because no capital asset had
come into existence in lieu of incurrence of the upfront fee. The
Ld. AR also submitted that the Assessing Officer, while
disallowing the impugned amount, had primarily relied on the
judgment of the Hon’ble Bombay High Court in the case of
Taparia Tools Ltd. vs. JCIT wherein similar upfront fee payable
for reduction of interest had been disallowed but this judgment of
the Hon’ble Bombay High Court had been reversed by the Hon’ble
Apex Court in the case of Taparia Tools Ltd. vs. JCIT reported in
372 ITR 605 wherein it was held that one time upfront interest
payment was to be allowed as deduction in the year of payment
itself and, therefore, the impugned disallowance deserved to be
deleted.
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07
10.7 In response, the Ld. Sr. DR placed reliance on the
findings and observations of both the lower authorities.
11.0 Having heard the rival submissions, we take up the
issues one by one. In assessment year 2003-04, the assessee
has challenged the 4/5th disallowance out of Technology
Enhancement Fee, Agronomy Management Fee and Production
Facility Management Fee and has raised the issue in grounds
3,4,5 and 6. The Ld. AR has drawn our attention to the Licence
Fee Agreement as well as the Service Agreement and has
emphasised that the amounts paid had been paid under the
terms of the two agreements. It is the contention of the Ld. AR
that although the licence fee paid by the assessee has been
accepted by the department in earlier years, the other fees were
not allowed on the ground that the benefit was of enduring
nature and could not be said to have accrued only in one year. It
is the contention of the Ld. AR that the impugned fees have been
paid for the purpose of providing and sharing improvements in
technology, training of staff, production facility management,
technology review etc. It is seen that the Assessing Officer, while
making the disallowance, has observed that technical services
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 and training provided by M/s Technico to the assessee company
had provided enduring advantage to the assessee company which
would benefit the assessee over a number of years and, therefore,
allowing the entire expenditure in one year might give a distorted
picture of profits in a particular year. While making the
disallowance, the Assessing Officer has also placed reliance on
the judgment of the Hon’ble Apex Court in the case of Madras
Industrial Investment Corporation vs. Commissioner of Income
Tax reported in 225 ITR 802 (SC). The Ld. Commissioner of
Income Tax (A), while upholding the disallowance, also seconded
the view taken by the Assessing Officer. Thus, apart from
observing that the impugned fees gave an enduring benefit to the
assessee company and, therefore, the allowability of expenditure
had to be spread over 5 years, the lower authorities have not
given any cogent reason for making the disallowance.
Undisputedly, the factum of the fees having been paid is not
disputed. Nor it is disputed that the impugned fees were paid for
services which were, in fact, rendered by Technico Pty. Ltd. to the
assessee company. Undisputedly, the impugned expenditure is
not in the nature of capital expenditure. The lower authorities
have placed reliance on the judgement of the Hon’ble Apex Court
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 in the case of Madras Industrial Corporation Ltd. vs. CIT (supra)
while holding that since the benefit was accruing to the assessee
over a number of years, the same could not be allowed as a
deduction in one year. However, it is seen that the judgment of
the Hon’ble Apex Court in the case of Madras Industrial
Corporation Ltd. vs. C.I.T. (supra) was rendered in the context of
allowability of discount on debentures and, admittedly in this
case, the liability was to accrue from year to year for a period of
12 years. It is in this context that the Hon’ble Apex Court held
that since the payment was to secure a benefit over a number of
years and there was a continuing benefit to the business of the
assessee company for a number of years, the liability should,
therefore, be spread over a period of debentures. However, we
find that the instant case is squarely covered by the judgment of
the Hon’ble Apex Court in the case of Taparia Tools Ltd. vs JCIT
(supra) wherein it has been laid down by the Hon’ble Apex Court
that normally the revenue expenditure incurred in a particular
year has to be allowed in the year the assessee claims that
expenditure and the department cannot deny the same. The
Hon’ble Apex Court went on to hold that even the fact that the
assessee had deferred the expenditure in the books of account
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 would be irrelevant. In this judgment, the Hon’ble Apex Court
has also taken note of its earlier judgment rendered in the case of
Madras Industrial Investment Corporation Ltd. vs. C.I.T. (supra)
and has, thereafter, held that the Income Tax Act enables and
entitles the assessee to claim entire expenditure in the manner it
is claimed u/s 37(1) of the Act as long as the same is not capital
in nature. Therefore, respectfully following the ratio of the
judgment of the Hon’ble Apex Court in the case of Taparia Tools
Ltd. vs. JCIT (supra), we are unable to concur with the findings of
the Ld. Commissioner of Income Tax (A) in this regard and while
setting aside the order of the Ld. Commissioner of Income Tax (A)
on this issue, we direct the Assessing Officer to allow the entire
expenditure in the assessment year in which it is claimed.
Accordingly, ground nos. 3, 4, 5 and 6 in assessment year 2003-
04 and identical ground nos. 5, 6, 7, and 8 in assessment year
2004-05, ground nos. 4, 5, 6, 7 in assessment year 2005-06 and
ground nos. 3, 4, 5, and 6 in assessment year 2006-07 stand
allowed.
11.1 Ground no. 7 in assessment year 2003-04 challenges
the action of the Assessing Officer in holding the expenditure
with respect to loose tools as being capital in nature and allowing
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 depreciation @25% thereon. A perusal of the assessment order
shows that the Assessing Officer has simply mentioned that the
expenditure on loose tools is of capital nature, the same was to
be capitalized and depreciation had to be allowed thereon. The
Ld. Commissioner of Income Tax (A), while upholding the
disallowance, has noted that the assessee had submitted before
the Assessing Officer that the depreciated value of loose tools was
arrived at on the basis of amortisation of cost over a period of
three years as per the regular accounting policy being followed by
the assessee company. The Ld. Commissioner of Income Tax (A)
went on to hold that since the assessee company itself had
admitted that they were amortising the cost of the loose tools
over a period of three years as per the regular accounting policy,
the Assessing Officer was justified in treating the same as being
capital in nature and allowing 25% depreciation thereon. Thus,
apparently, the assessee has taken contradictory stands before
the lower authorities and, therefore, it is our considered opinion
that it will be in the fitness of things if the issue is re-examined
by the Assessing Officer. Accordingly, we restore the issue of
expenditure on loose tools having been treated as capital
expenditure by the AO/Ld. CIT (A) to the file of the Assessing
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 Officer with the direction to re-examine the issue and, thereafter,
adjudicate the issue as per law after giving due opportunity to the
assessee to present its case. Accordingly, ground no. 7 in
assessment year 2003-04, and identical Ground no. 4 in
assessment year 2004-05, ground no. 2 in assessment year
2005-06 stand allowed for statistical purposes.
11.2 Ground no. 3 in assessment year 2004-05 challenges
the action of the department in dis-allowing the upfront fee of Rs.
2,00,00,000/- paid to ICICI Bank Ltd. for reducing the rate of
interest payable on pro rata basis and spreading the same over
the entire period of the loan. We find that this issue is also
covered in favour of the assessee by the judgment of the Hon’ble
Apex Court in the case of Taparia Tools Ltd. vs. JCIT (supra)
wherein the Honble Apex Court held that the treatment in the
books of accounts was not determinative of the taxability. The
relevant observations of the Hon’ble Apex Court are contained in
Para, 10,11,12,15,16, 18, 19 20 and 21 and the same are being
reproduced hereunder for a ready reference:-
“10. The only reason which persuaded the AO to stagger and spread the interest over a period of five years was that the term of debentures was five years and that the assessee had itself given this very treatment in the books of account, viz, spreading it over a period of five years in its final accounts by not debiting the entire 27
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 amount in the first year to the Profit and Loss account and it has, in fact, debited l/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of 'Matching Concept' to support this conclusion.
Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of Rs. 55 per debenture towards interest as one time payment. By allowing only l/5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so he was simply discharging the interest liability in that year thereby saving the recurring liability of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowed amount.
The next question which arises for consideration is as to whether the assessee was estopped from claiming deduction for the entire interest paid in the year in which it was paid merely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch 28
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of account is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of account. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(l)(iii) of the Act as all the conditions thereof were fulfilled and, thus, it was exercising the statutory right which could not be denied. …………
What is to be borne in mind is that the moment second option was exercised by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC), this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date.
………….
Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure 29
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: …………
What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures.
In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely 30
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Mfg. Co. Ltd. v. CIT[1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC).
At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(l)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.
In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of Rs. 2,72,25,000 and Rs. 55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs/' (emphasis supplied)
11.2.1 Accordingly, respectfully following the judgment
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 of the Hon’ble Apex Court as aforementioned, we are of the
considered views that the entire upfront fee was allowable as a
deduction in assessment year 2004-05 itself and accordingly, we
set aside the order of the Ld. Commissioner of Income Tax (A) on
the issue and direct the Assessing Officer to allow the entire
amount in the year under consideration.
11.3 Ground no. 1 in assessment year 2001-02, ground
nos. 1,8 ,9 in assessment year 2003-04, ground nos. 1, 9 and 10
in assessment year 2004-05, ground nos. 1,8 and 9 in
assessment year 2005-06 and ground nos. 1, 7 and 8 in
assessment year 2006-07 are general in nature and do not
require any adjudication.
12.0 In the result, all the five appeals of the assessee stand
partly allowed in terms of our observations contained in the
preceding paragraphs.
Order pronounced in the open court on 19th November, 2018.
Sd/- Sd/-
(G.D. AGRAWAL) (SUDHANSHU SRIVASTAVA) VICE PRESIDENT JUDICIAL MEMBER
Dated: 19th NOVEMBER, 2018 ‘GS’
ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07