DAIMLER CHRYSLER INDIA PVT. LTD.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,, PUNE

आदेश / ORDER आदेश आदेश आदेश

PER D. KARUNAKARA RAO, AM :

There are 3 appeals under consideration for the common A.Y.

1998-1999. ITA Nos.1381 and 1325/PUN/2003 are the cross appeals

filed by the assessee and the Revenue. C.O. No.50/PUN/2004 is filed

by the assessee.

issues raised in the appeal of the assessee. Therefore, as per Ld.

Counsel for the assessee, the cross objection filed by the assessee

becomes infructuous. Accordingly, the said C.O. is dismissed as such.

That leaves the Cross appeals filed by the assessee and the revenue for

adjudication.

appeals are extracted here as under :

Grounds by Revenue :

“1. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs.37,80,388/- made on account of relocation expenses, as it is in the nature of enduring benefit to the assessee and does not partake the character of revenue expenditure. 2. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the disallowance of Rs.47,71,593/- made out of travelling expenses, as it is not verifiable that the entire expenditure has been incurred wholly and exclusively for the purpose of assessee’s business. 3. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the entire addition of Rs.10,000/- lakhs (sic) made out of telephone expenses since the personal use of telephone cannot be ruled out. 4. The order of the CIT(A) may be vacated and that of the AO be restored. 5. The appellant craves leave to add, amend or alter any of the above grounds of appeal.”

Grounds by Assessee :

“1. On the facts and in the circumstances of the case the CIT(A)-III, Pune has erred in : 1. Disallowing Rs.12,55,52,666/- towards portion of the Technical Know-how expenses paid in kind and claimed by the assessee under section 35AB of the Income Tax Act, 1961.

the business of manufacture and sale of Mercedes Benz passenger cars

in India. Assessee filed the return declaring loss of Rs.85.28 crores

(rounded off). At the end of the assessment proceedings u/s.143(3) of

the Act, the AO reduced the said loss. The assessee’s loss is determined

at loss of Rs.54,90,17,409/-. AO made various additions and the

details of additions are extracted here as under :

Net loss as per Profit & Loss A/c. 124,61,48,833 Profit on sale investment 28,45,218 Add : i) Depreciation as per books 284,812,204 ii) Wealth Tax 2,291,391 iii) Product warranty expenses 30,656,095 iv) Misc. expenses written off 5,037,402 v) Leave Equalization reserve 2,02,71,804 vi) Provision for gratuity 7,82,750 vii) Cash payment 40A(3) 51,622 viii) Custom duty payable 4,15,19,739 ix) Provision for bad debts 1,08,67,587 x) Provision for write off on 19,13,60,149 material/finish goods √ xi) Excess interest provision reversed 1,72,87,043 xii) Donation 35,500 xiii) Stamp/Registration charges on 68,47,448 increase in share capital xiv) Provision for unrealized loss on 1,76,52,992 Foreign Exchange

xv) Assets written off √ 4,98,93,086 xvi) Disallowance Capital Loss 9,79,25,924 xvii) Loss on sale of assets 1,76,88,375 xviii) Reallocation of expense √ 37,80,388 xix) Interest payment of Daimler Benz 2,32,28,218 xx) Renovation expenses 21,78,402 xxi) Payments to clubs √ 1,67,600 xxii) Out of travelling expenses √ 47,71,593 xxiii) Out of telephone expenses √ 10,00,000 83,01,07,312 41,60,41,521 Add : Depreciation 9,56,75,000 Deduction u/s.35D 81,966 Deduction u/s.35AB √ 3,63,88,653 Warranty expenses 36,75,487 13,58,21,106 Business Income/Loss 55,18,62,627 Income from short term capital gain 28,45,218 Total income/loss 54,90,17,409 √ : denotes the disputed additions in these cross appeals.

Out of the above additions, the additions u/s.35AB of the Act,

write off of capital work in progress qua Mercedes Benz India’s Car of

Model W124, club expenses, relocation expenses, other adhoc

disallowances on account of travel and telephone expenditure are the

contentions/issues before the Tribunal by both the parties.

issues and the CIT(A) partly allowed the appeal of the assessee. While

the issues relating to disallowance u/s.35AB of the Act, capital work in

progress and the club expenses are decided against the assessee, the

other issues on account of relocation expenses, adhoc expenses on

account of travel and telephone expenses are allowed in favour of the

assessee. Accordingly, both parties are in appeal by virtue of the cross

appeals before the Tribunal.

paragraphs. Firstly, we take up the appeal of the Revenue.

ITA No.1325/PUN/2003 – By Revenue A.Y. 1998-1999

are agitated by the Revenue and summarized as under :

a. Deletion of disallowance of relocation expenses made by the AO considering the same to be personal expenses. b. Deletion of adhoc disallowance of travelling expenses made by the AO considering the same to be non-business expenditure. c. Deletion of adhoc disallowance of telephone expenses made by the AO considering the same to be non-business expenditure.

Issue-wise adjudication

Rs.37,80,388/-: The facts relating to that the assessee employs

specialists/expatriates in various fields from Daimler Chrysler Project

Consultant (DCPC). There is an agreement in this regard. According to

the agreement, assessee is under contractual obligation to pay the

expenses on travel to the said specialists/expatriates and their families

as well as transportation of their furniture etc. to and fro from India.

These expenses which are borne by the assessee are in the nature of

salary paid to the expatriates. These payments are taxable in their

hands according to the provisions of the Income Tax Act. The expenses

incurred on travel and transportation constitutes Revenue expenditure.

Therefore, the same is debited to the profit and loss account as they are

incurred wholly and exclusively for the purpose of business of the

assessee. However, the AO did not allow the said claim for want of

evidence and held that in the absence any material evidence to show

that the same were incurred wholly and exclusively for the purpose of

business, the same constitutes personal expenses. However, during the

First Appellate proceedings, assessee furnished requisite information

before CIT(A). On perusal of the same and considering the submissions

of the assessee, the claims of the assessee were allowed in favour of the

assessee. In the process, the CIT(A) relied on the finding of his

predecessor for the subsequent A.Y. 1999-2000. Aggrieved with the

relief granted by the CIT(A), the Revenue is in appeal before us with the

grounds extracted above.

submissions stating that the decision of the CIT(A) in granting relief to

the assessee on this account for the A.Y. 1999-2000, was affirmed by

the ITAT in its order dated 31-03-2009. Copy of the said order is placed

in pages 1056 to 1062 of the paper book. In the written submissions,

assessee submitted that similar claim was allowed in the subsequent

assessment years 2001-02 and 2002-03 as Revenue expenditure. In

this regard, Ld. Counsel for the assessee pleaded for confirming the

relief granted by the CIT(A) on the issue of enduring benefit of relocation

expenses as Revenue income.

Tribunal in assessee’s own case in ITA No.936/PN/2003 and

C.O.No.27/PN/2004, dated 31-03-2009 for the A.Y. 1999-2000. The

Tribunal vide the discussion given in Para No.5 of the said order

dismissed the ground raised by the Revenue and held the issue in

favour of the assessee. Therefore, we find it appropriate to extract the

finding given by the Tribunal here as under :

“5. We have heard both the parties and perused the materials available on record. It is seen that the assessee incurred the relocation expenses in respect of experts coming from abroad to work with it for a period of 2 to 3 year and travelling and the expenses relating to transfer, lodging and boarding were borne by the assessee as per the agreement

of service employment with such experts. These expenses were for the purpose of business and were part of the cost of employees services. No enduring benefit had accrued to the assessee either in the capital field and there was no creation of any capital asset nor it affected the fixed capital of the assessee. The experts who came for the period of 2 to 3 years returned after the contract period was over. Therefore, it is not correct to say that any enduring benefit accrued to the assessee which could be held as disallowable as capital expenditure. The services of such experts were undertaken only for the contact and improvement of the business. In this view of the matter, we do not find any infirmity in the order of the CIT(A) in deleting the impugned addition. The ground No.1 raised by the revenue is thus rejected.”

Revenue has not brought anything on record to demonstrate the

facts of the issue for the year under consideration are anyway different.

Considering the above, we are of the opinion that the order of CIT(A) is

fair and reasonable and it does not call for any interference.

Accordingly, Ground No.1 raised by the Revenue is dismissed.

Travel expenses – Rs.47,71,593/- and Telephone Expenses

(Rs.10,00,000/-). Facts relating to this issue include that the assessee

claimed traveling expenses and conveyance expenses amounting to

Rs.47,71,593/- and debited the same to the profit and loss account.

AO found the absence of third party vouchers and therefore, on adhoc

basis, i.e., 10% of the claim, was disallowed. Similarly, out of telephone

expenses claimed amounting to Rs.1,84,14,978/-, an adhoc sum of

Rs.10 lakhs was disallowed. In the First Appellate proceedings, the

CIT(A) granted relief relying on the order of his predecessor in the

assessee’s own case for the A.Y. 1999-2000.

of expenditure on account of travelling expenses/conveyance expenses

as well as the telephone expenses are genuine and adopting the adhoc

manner of making disallowance is unsustainable in law. He submitted

that the assessee has scrupulously maintained the requisite evidences

after due process of internal audit system and therefore, no

disallowance is called for on this account. The fact that Tribunal

disapproved the manner of making such disallowance in the assessee’s

own case for the A.Y. 1999-2000 was demonstrated by bringing our

attention to the decision of Tribunal, copy of which is placed at pages

1056 to 1062 of the paper book.

Tribunal in assessee’s own case for the A.Y. 2009-10 (supra), we find

the Tribunal has not approved the system of making adhoc

disallowance adopting the flat rate of 10%. Contents of Para No.9 of

the order of Tribunal are relevant. For the sake of completeness, the

said para is extracted as under :

“9. We have heard both the parties and perused the material available on record. It is seen that all the expenses were incurred for the purposes of business and the details thereof were furnished before the AO. The expenses were booked against vouchers which were duly supported by tickets and other bills incurred by the employees of the company for the purpose of travelling. The AO has not pointed out any instance as to in which sit could be termed as personal or not incurred for the purpose of business. The adhoc disallowance of 10% was arbitrary and without any basis. The assessee is a private limited company having large turnover and for that reason and considering the nature of business of the assessee the expenses on travelling are also quite large. In such a situation, adhoc disallowance is not called for. The AO has not found even a single instance to show that any part of the travelling expenses was not incurred for the purpose of business. In this view of the matter, we do not find any infirmity in the order of the CIT(A) in deleting the impugned addition.”

Revenue has not brought anything on record to demonstrate the

facts of the issue for the year under consideration are anyway different.

Considering the above, we are of the opinion that the assessee’s claim

for allowing the travelling and conveyance expenses is allowed in

favour of the assessee. To that extent, the order of CIT(A) is fair and

reasonable and it does not call for any interference. Ground No.2 raised

by the Revenue is dismissed.

expenses, is raised for the first time in this year. AO made

disallowance of a portion of expenditure on adhoc basis. There is no

finding of fact why such disallowances are called for in this assessment

year, when the claim of the assessee is allowed in the earlier

assessment years. However, it is the claim of the assessee before us

that the very fact the manner of making disallowance on adhoc basis is

not approved by the Tribunal, therefore, the approach of the AO

resorting to such adhoc disallowance of the claim on account of

telephone expenses should also be not approved by the Tribunal.

finding of CIT(A) given in Para No.8.3 of his order and the same is

reproduced as under :

“8.3 The submissions have been considered. I agree with the Appellant’s Representative that the adhoc disallowance is not supported by any material to show that any such part of the expenses was not incurred for the personal use. Similar issue was considered in the appellant’s own case for A.Y. 99-00 (supra) and disallowance made by the Assessing Officer was deleted. The fact being similar, following that decision, the addition is deleted.”

Considering the above of the Tribunal against the adhoc

disallowance in assessee’s own case and the decision of CIT(A) on this

issue, we are of the opinion that the disallowance made by the AO on

this telephone expenses cannot be sustained. Accordingly, Ground

No.3 raised by the Revenue is dismissed.

We shall now take up the appeal of the assessee.

ITA No.1381/PUN/2003 – Assessee A.Y. 1998-1999

a. Denial of deduction u/s.35AB of the Act in relation to technical know- how fees paid in kind. b. Disallowance of expenditure in relation to write off of capital work in progress (CWIP) due to discontinuation of MB India Car Model W 124. c. Disallowance of payment towards membership fees for Poona Golf Club and Hyatt Regency New Delhi, for Managing Director and other executives of the company considering the same as non-business expenditure.

Issue wise adjudication :

Regarding the denial of deduction u/s.35AB of the Act in relation to the

technical know-how fees paid in kind amounting to Rs.12,55,52,666/-,

the background facts include that the assessee was incorporated on

22-11-1994. Assessee (DCIPL) also called as MB-India or MBIPL is a

joint venture involving Daimler Benz AG (DBAG) and Tata Engineering

and Locomotive Company Ltd. (TELCO) at the time of incorporation. As

per the Joint Venture agreement, the ‘Contribution Agreement’ was

entered in June 1994 between Daimler Benz AG, Mercedes Benz AG

(MBAG) and TELCO. According to which, MBAG-a subsidiary of DBAG,

was to provide DCIPL the Indian Company, the technical know-how for

manufacture of passenger cars in India. DBAG had an option to

convert the sum payable by DCIPL as its capital contribution.

Accordingly, being the Ist installment, DBAG the Panchayat Germany

was allotted 3,72,42,800 equity shares worth Rs.37,24,28,000/- (DM

18.8 million) in November 1995. In this connection, the AO granted

NOC for such allotment and the TDS amounting to Rs.8.05 crores

(rounded off) was done as per the rules on the said allotment. A TDS

certificate was issued in the name of MBAG who supplied the technical

know-how to the assessee. Subsequently, the second instalment was

recorded as payable in the A.Y. 1996-97 and allotted shares worth

Rs.42.30 crores. In this connection, assessee made TDS of Rs.8.43

crores (around) as per the rules in this regard. It was informed that

two other instalments of the payment were waived. A table showing the

details of payment of instalments and the quantitative details of

Rs.16,19,41,319/- is given as under :

Particulars First Instalment Second Total (Rs.) (Rs.) Instalment (Rs.) Shares allotted 37,24,28,000 42,30,00,000 79,54,28,000 TDS 8,50,13,600 8,43,36,800 16,93,50,400 Less : TDS refund (1,05,28,000) -- (1,05,28,000) R&D Cess 2,36,14,680 2,53,66,840 4,89,81,520 Total 47,05,28,280 53,27,03,640 1,00,32,31,920

The total amount of Rs.1,00,32,31,920 was claimed as a deduction over the assessment years AY 1995-96 to AY 2001-02

AY Deduction Deduction Deduction under Claimed (Rs.) Allowed (Rs.) dispute (Rs.) 1995-96 8,01,76,046 8,01,76,046 0 1996-97 16,89,59,987 3,63,88,653 13,25,71,334 1997-98 16,89,59,987 3,63,88,653 13,25,71,334 1998-99 16,19,41,319 3,63,88,653 12,55,52,666 1999-00 16,72,05,320 3,46,33,986 13,25,71,334 2000-01 16,72,05,320 3,46,33,986 13,25,71,334 2001-02 8,87,83,941 1,82,83,944 7,04,99,997 Total 1,00,32,31,920 27,68,93,921 72,63,37,999

respect of technical know-how fee u/s.35AB of the Act amounting to

Rs.16,19,41,319/- for the A.Y. 1998-99 in the return of income filed

u/s.139(1) of the Act (Ref. table above). Out of this amount,

Rs.3,63,88,653/- was paid by way of TDS and there is no dispute about

the allowing of claim of deduction in this regard. However, the balance

amount of Rs.12,55,52,666/- (Rs.16,19,41,319 – Rs.3,63,88,653) in the

subject matter of litigation now. During the assessment proceedings,

the said manner of payment towards the liability of technical know-how

supplied by MBAG to assessee was not accepted by the AO. AO is of

the opinion that the said allotment of shares towards capital

contribution in DCIPL-the Indian company, does not amount to

expenditure at all to become eligible for claim of deduction u/s.35AB of

the Act. AO relied heavily on the judgment of Hon’ble Supreme Court in

the case of CIT Vs. EIMCO & KCP Ltd. 242 ITR 659. CIT(A) upheld the

said disallowance following his order later for the A.Y. 1999-2000.

made by the Revenue to deny the claim us.35AB of the Act in the A.Yrs.

1995-96, 1996-97 and 1997-98 either under the provisions of section

148 or u/s.263 or u/s.154 of the Act, as the case may be. In all these 3

years, the proceedings were quashed for one reason or the other on

technical grounds. In effect, this issue is not yet decided conclusively

by the Tribunal or any other judicial body on merits. Therefore, the

issue raised in this year requires to be adjudicated for the first time on

merits.

(B) Further, it is also relevant to note that similar addition was made

in the A.Y. 1999-2000 and the matter reached the Tribunal. The

Tribunal remanded the issue to the Revenue authorities. In the second

round of the proceedings, the issue again reached the Tribunal, which

will have to be decided based on the outcome or the issue in this

assessment year. Further also, it is mentioned that AOs continued to

deny the claim of deduction for the later A.Yrs. 2000-01 and 2001-02

too.

from the orders of the AO and the CIT(A), it is evident that the claim of

the assessee is not allowed for the reason that the allotment of equity

shares towards the liability does not amount to “paid” and further, such

squiring up of liability falls short of the meaning of the expression

“lump sum consideration” or it does not amount to “consideration” too.

It is the reasoning of the AO that the allotment of shares does not

amount to incurring of any expenditure or payment of lump sum

consideration. Consequently, as per AO, the assessee is not entitled to

deduction u/s.35AB of the Act on account of technical fee for transfer

of technical know-how. AO relied heavily on the judgment of Supreme

Court in the case of CIT Vs. EIMCO & KCP Ltd. (supra). Further, the

CIT(A) dismissed the appeal of the assessee on this issue after

considering the submissions made by the assessee’s counsel before the

CIT(A)/AO in connection with the adjudication of the same issue in A.Y.

1999-2000. (Para 2 and its other paragraphs are relevant). Nothing

much is discussed by the CIT(A) in his order for this year.

“2.2 The Appellant’s Representative reiterated the arguments given before the Assessing Officer and this issue was also decided in appeal in respect of A.Y. 1999-2000 in the case of the appellant vide appellate No. dated and the issue was considered against the appellant and the disallowance made by the Assessing Officer was confirmed. Following that order being on the same issue the disallowance made by the Assessing Officer is confirmed and the ground of appeal is rejected.”

Tribunal.

BEFORE THE TRIBUNAL

assessee along with his partners appeared before us and filed a written

note on this issue giving various propositions. To sum up, it is the case

of the Ld Counsel for the assessee was critical of AO relying on the

judgment of Supreme Court in the case of CIT Vs. EIMCO & KCP Ltd.

(supra) and held that the same is inapplicable to the facts of the present

case. According to Ld. AR, therefore, the claim of the assessee should

be allowed.

Further, referring to the judgment of Bombay High Court in the

case of CIT Vs. Paul Brothers 216 ITR 548, Ld. Counsel for the assessee

submitted that when the claim of deduction u/s.35AB is undisturbed in

the first assessment year of the claim of deduction u/s.35AB of the Act,

the AO cannot disturb the similar claim in the subsequent years. On

merits of the provisions of section 35AB of the Act, Ld. Counsel

analysed the provisions of the said section and mentioned that the

meaning of expressions “paid” and “lump sum consideration” are met in

substance. Further, differentiating the expressions, i.e. “expenditure”

and “consideration", Ld. Counsel submitted that the expression

“consideration” is not similar in meaning to the “expenditure” as

referred to by the AO in his order. Expanding the same, Ld. Counsel

submitted that “expenditure” restricts itself to something; whereas the

expression “consideration” can be in the nature of mandatory payment

or Act or Abstinence from doing something at the desire of the parties.

He also relied on the judgment of Supreme Court in the case of

Chandroji Rao Vs. CIT 77 ITR 743 which differentiates the terms

“expenditure” and “consideration”. Applying the same principle to the

facts of the present case, Ld. Counsel for the assessee submitted that

the expression “consideration” is already defined by the provisions of

section 2(d) of the Indian Contracts Act, 1872 and submitted that the

word “expenditure” is undefined. He also drew our attention to the

provisions of section 269A of the I.T. Act and submitted that the

“apparent consideration” is defined and the said definition helps the

assessee’s line of arguments. On the meaning of “consideration” qua

the Indian Contracts Act, 1872, Ld. Counsel relied on various decisions

which are extracted in para 27 of the written note. Ld. Counsel relied

on the judgment of Supreme Court in the case CIT Vs. Nainital Bank

Ltd. 62 ITR 638 stating that the term “expenditure” includes the

payment in kind. It is the argument submitted before us without

prejudice to the other arguments. In this regard, stating that the

provision of section 35AB of the Act, being a deduction provision needs

to be interpreted liberally and for this, Ld. Counsel relied on the

decision of Delhi Bench of the Tribunal in the case of All India Lakshmi

Commercial Bank Officer’s Union and others 150 ITR 1 for the

proposition on liberal interpretation. He further submitted the heading

of section 35AB of the Act states “Expenditure and know-how” and

there is no such requirement in the section that what can be deducted

has to be necessarily “expenditure”. The term “consideration” used in

section 35AB of the Act is understood to have a wider meaning than

“expenditure”. He submitted that, while expenditure restricts itself to

something which is paid out of the pockets of the assessee, the

‘consideration’ can be in the nature of monetary payment or any act or

abstinence from doing something at the desire of concerned parties. He

further submitted that the term “consideration” would include payment

in kind and swapping of shares for the liabilities. For this proposition,

he relied on various decisions. H submitted that meaning of the term

“lump sum” used in section 35AB of the Income Tax Act include

payment of consideration in instalments if the same is fixed upfront and

relied on various decisions.

Further, Ld. Counsel relied on the decision of Pune Bench in the

assessee’s own case for the A.Yrs. 1996-97, 1997-1998 and mentioned

that the Tribunal made some references to the issues under

consideration though the re-assessment orders/revisions orders was

quashed on technical grounds. Ld. Counsel mentioned that, in the

context of the observation of the Tribunal in own case, it is simply a

method of accounting, mode of payment the allotment of shares to clear

the debt definitely has not changed the character of payment of “lump

sum consideration” (para No.37 of the written note) paid for acquisition

of the technical know-how. Therefore, the claim of deduction u/s.35AB

of the Act is allowable.

Further, on the application of Supreme Court judgment in the

case of CIT Vs. EIMCO & KCP Ltd. (supra), Ld. Counsel submitted that

the said judgment is inapplicable to the facts of the present case and

the details are given in Para No.39 and 40 of the written note. He also

furnished rebuttal to the conclusions in the order of CIT(A) for the A.Y.

1999-2000 in his note.

Referring to the expression term “Paid” used in the sub-section (1)

of section 35AB of the Act, Ld. Counsel for the assessee submitted that

the said expression was defined in section 43(2) of the Act, which

means “actually paid” or incurred according to the method of accounting

upon the basis of which profits and gains are computed under the head

Profit and Gains of Business or Profession”. Referring to the provisions

of section 35ABA of the Act, Ld. AR further submitted that wherever the

legislature intended the payment by transfer of money, it has provided

so, i.e. ‘actually paid’ and, in absence of such specific language the

provisions of section 35AB of the Act cannot be interpreted against the

assessee. Applying the said definition, Ld. Counsel reasoned that the

moment the shares are allotted by the assessee to clear the debt, the

payment is completed and therefore, it is a case of “actually paid” and

in that case, the conditions specified in the sub-section (1) of section

35AB stands met. Further, elaborating the term “Paid”, Ld. Counsel for

the assessee relied on the Bombay High Court Judgment in the case of

CIT Vs. Raymond Ltd., judgment of Karnataka High Court in the case of

Amco Power Systems Ltd.(supra) and the decision of Pune Bench of the

Tribunal in the case of Kalyani Steels Ltd. DCIT 59 TTJ 316 (Pune). Ld.

Counsel for the assessee made the following prayer :

“Further, where accounts are settled by way of entries in the books of accounts and not 'actually paid by way of money', the same should also be treated as 'paid' or incurred'. In this regard, reliance is placed on the decision in case of Teletherm Instruments Co (P.) Ltd. Vs ACIT (1993) 45 ITD 203 (Mad) (refer page 981 to 984 of the Paper Book) where the definition of the term 'paid' as given under section 43(2) was applied in the context of section 35AB to mean that on execution of the agreement entire amount can be said to have been 'paid' as per the mercantile method of accounting.

Hence, based on the aforesaid judicial precedents, it is our humble submission that the term 'paid' does not require actual payment in cash. The term 'paid' includes even incurrence of liability as per the mercantile method of accounting and the same also includes adjustment by way of accounting entries without actual cash outflow. Accordingly, where the liability towards technical know-how fee is incurred by MB India upon signing the technical know-how agreement with MBAG, and further the said liability is settled by issuing shares to DBAG, the same should be considered to have satisfied the term 'paid' for section 35AB.”

It is the argument of the Ld. Counsel for the assessee that, by allotment

of shares, by the assessee to Daimler Benz AG at the instance of MBAG

who supplied the technical know-how to the assessee as per the

contractual agreement, the conditions relating to the “lump sum

consideration” and “paid” are met. Therefore, the claim of the assessee

relating to deduction u/s.35AB of the Act is allowable.

Further, he submitted that these provisions of section 35AB of

the Act, being beneficial one there is a requirement of interpreting the

provisions in favour of the assessee. For this proposition, he relied on

the following judgmental laws :

Ld. Counsel for the assessee submitted that once the assessee

incurs any cost towards acquisition of know-how, the deduction for the

same was always intended to be allowed to the assessee. In this

regard, he referred to amendment of section 32 by the Finance Act,

1998 which allows the depreciation on the intangible assets, such as

know-how acquired on or after 01-04-1998. He submitted that the MB

India issued shares in lieu of genuine pre-existing debt and the same

should be considered for consideration in cash. In this regard, he

submitted that, as per the Company Law provisions, the issue of shares

against a genuine debt is held to be “issue of shares for cash”.

Ld. Counsel further submitted that mere discharge of liability by

way of allotment of shares would not change the character of lump sum

consideration “paid” for acquisition of technical know-how. Ld.Counsel

relied on the decision of ITAT, Pune in the assessee’s own case for the

A.Yrs. 1996-97 and 1997-98.

Ld. Counsel distinguished the decision relied on the Revenue

authorities for denying deduction u/s.35AB of the Act in the case of CIT

Vs. EIMCO KCP Ltd. 242 ITR 659 (SC). The reasons are given below :

a. In the EIMCO case the assessee claimed the deduction under section 37(1) whereas in MB India's case, the deduction is claimed under section 35AB which was introduced later in the point of time due to change in intention of the Government (to attract flow of technology into

India) to allow deduction for such payments.

In MB India's case, the transfer of technical know-how for consideration (between MB India and MBAG) and allotment of shares (by MB India to DBAG) are two separate transactions entered after incorporation of the company. However, in EIMCO where there was only a single transaction I obligation of contribution of capital by the subscribers, which was made by EIMCO by way of contribution of technical know-how.

b. Supreme Court decision in EIMCO was in the context of deduction under section 37, which required an item to be "expenditure" in order to be deducted as compared to words "Iumpsum consideration" used in section 35AB which is wider than the term "expenditure" .

c. It should be noted that in MB India's case, it was much after incorporation and date of the technical know-how agreement that Daimler Benz AG exercised its option to contribute to share capital in kind by taking over MB India's liability to MB AG towards technical knowhow. However, in case of EIMCO, the subscribers to the memorandum of association at the very outset agreed that share capital would be contributed in kind as a part of subscription capital.

d. Reliance is also placed on the judicial pronouncement of the Hon'ble Delhi High Court in the case of Commissioner of Income Tax vs Reinz Talbras Pvt. Lid. (2001) 252 ITR 637 (Del) (refer page 968 to 970 of the Paper book). While interpreting the ratio of EIMCO decision, the Hon'ble High Court held that the amount attributable to technical know- how which is discharged by way of issue of shares by a new company was not revenue expenditure, but it is to be treated as capital expenditure. Thus, the Delhi HC has not treated technical know-how as contribution towards share capital but a capital expenditure.

e. Hon'ble ITAT in MB India's own case for AY 1996-97 and AY 1997-98 has also rightly observed that the Supreme Court decision in EIMCO (supra) is not applicable to the facts of MB India.

f. Hon’ble Madras High Court in EIMCO’s case itself refers to payment of technical know-how as a consideration in two separate places in its order.

He further submitted that AO issued NOC to MB India Ltd., in

order to issue equity shares towards remittance of technical know-how

fees. Thus, the AO agreed to pay the technical know-how fees by way of

issue of equity shares. Also, MB India Ltd. deducted requisite taxes at

source while making the said payment. The fact of deduction of TDS

evidences the same.

Ld. Counsel referred to the Budget Speech 1985 for explaining the

purpose of provisions inserted by Finance Act, 1985 and relied on

couple of decisions. Thus, Ld. Counsel for the assessee prayed for

allowing deduction u/s.35AB of the Act to the assessee.

following submissions :

“3. The first installment of this lump sum consideration for the technical know-how was payable in MB India’s books in the FY 1994-95, i.e. AY 1995-96 and Daimler AG opted to contribute this sum payable by MB India to MBG as its capital contribution and accordingly, was allotted 3,72,42,800 equity shares on 27th November, 1995 (i.e. AY 1996-97). The second installment of this lump sum consideration for the technical know-how was payable in MB India's books in the FY 1995-96 i.e. AY 1996-97 and Daimler AG opted to contribute this payable by MB India as its capital contribution and accordingly was allotted 4,23,00,000 shares on 16th March, 1996, i.e. AY 1996-97. 4. MB India claimed deductions u/s 35AB of the IT Act for Rs.16,72,05,320 for the AY 1999-2000 out of which Rs.13,25, 71,334/- was disallowed and Rs.3,46,33,986/ - paid in cash was allowed. 5. The contention of the Assessing Officer(now referred as AO) was that technical know-how fees discharged by way of allotment of shares does not amount to 'expenditure' in view of the decision of the Hon'ble Supreme Court in the case of EIMCO K.C.P. Ltd. V. CIT [2000] 109 Taxman 151(SC). Thus the Revenue heavily relied on the above referred judgement and therefore, the reliance is placed on the orders of the AO and the Ld. CIT(A) in this regard by the undersigned. 6. The Ld. CIT(A) vide order dated 29th May, 2003 upheld the disallowance u/s. 35AB. The Hon'ble ITAT vide appeal 968/PN/03 remanded back the matter to the AO stating that adjudication on admissibility of the said deduction can only be done in the first year of the deduction. Now the first year i.e. the FY 1994-95 relevant to the AY 1995-96 the AO reopened the assessment proceedings u/s 147, which was quashed by the Hon'ble ITAT on account of technical grounds as the reassessment proceedings were not held to be valid. The contention of the Revenue therefore, is that adjudication on admissibility on deduction u/s.35AB could not be examined on merits and, therefore, deduction u/s. 35AB cannot be said to have been allowed in the AY 1995-96 i.e. the first year on merit. During the course of the hearing before the Hon'ble ITAT, the judgement of the Hon'ble Supreme Court in the case of DCIT Bangalore Vs ACE Multiaxes System Ltd. [(2017) 88 taxmann.com 69 (SC) was relied upon to make a proposition that each assessment year is a different assessment year, except for block assessment. The Hon'ble Supreme Court on the issue of liberal interpretation has held that construing liberally does not mean ignoring conditions for exemption. The copy of the impugned case law has already been submitted before the Hon'ble Bench during the course of the argument made by the undersigned. 7. During the course of the argument, the undersigned had also relied on the decision of the Hon'ble High Court of Bombay in the case of CIT vs Triumph International Finance (I) Limited [2012] 22 taxmann.com 138 (Born.) to make a proposition that where loan deposit has been repaid merely debiting account through journal

entries the assessee has contravened the provisions of section 269T of the Income Tax Act, 1961. During the relevant Assessment Year it was observed that instead of repaying loan and receiving sale price of shares both parties had agreed that the said amount i.e. a loan and sale consideration to be set off in their respective books by journal entries. In the impugned case before us the assessee has the technical know-how fees has been discharged by way of allotment of shares by merely entering into journal entries and therefore cannot be termed as "lump sum consideration" for payment of technical know-how as per the provision of section 35AB of the I T Act, 1961. The referred order has already been submitted by the undersigned during the course of the hearing. 8. The argument of the Ld. Counsel for the appellant that the word 'consideration' used in section 35 of the Income Tax Act, 1961 includes payment in cash or in kind is difficult to be accepted for the simple reason that heading of section 35AB itself is 'expenditure on know-how'. From the perusal of language of the section 35AB(1) which is reproduced here : ................................. ................................. it can be clearly seen that consideration has to be paid in cash and not in kind as claimed by the appellant. The wording in the section 'paid' and amount 'so paid' is quite clear as amount cannot be used in kind.

DECISION OF THE TRIBUNAL

deduction u/s.35AB of the Act. We have also perused the written

submissions as well as the case laws placed before us by both the

representatives. In fact, some of the paragraphs of the written

submissions from both the sides are extracted in this order considering

the immediate relevant of the same. Therefore, we proceed to

adjudicate this issue as per the contents in the succeeding paragraphs.

A. The provisions of section 35AB : The provisions of section 35AB

of the Act relating to ‘expenditure on know-how is extracted here as

under :

“35AB(1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year [relevant to the assessment year commencing on or before the Ist day of April, 1998] any lump sum consideration for acquiring any know-how for use for the purpose of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years.”

Explaining of the provisions : The above provision provides for

allowing deduction equivalent of 1/6th of the amount paid by the

assessee for acquiring know-how for use for the purpose of his business

in any previous year specified in the sub-section (1). The said

deduction is allowable in six equal instalments on fulfillment of the

basis of ‘paid’ and ‘any lump sum consideration’. Expression ‘paid’ and

‘so paid’ becomes significant. The balance of the amount, so paid, shall

be deductible in equal instalments for each of the five immediately

succeeding previous years. In the instant case, the above provisions

need to be applied in the factual matrix where assessee acquired the

know-how from MBAG, a Germany based 100% subsidiary of the

DBAG, a flagship company of the group. The consideration involved is

DM 56.6 Million. After considering the sum waived of by the supplier,

for unspecified reasons, the assessee was to pay DM 18.8 million before

01-04-1995. In terms of Indian Rupees (INR) the total amount payable

by the assessee to the supplier of know-how is Rs.100.32 crores.

Assessee discharged this liability for issuing the shares worth

Rs.47,05,28,280/- in the first instalment and the shares worth

Rs.53,27,03,640/- in the second instalment. Discharge of the liability

did not happen in terms of actual payment of money in cash or bank to

the actual supplier of the know-how. Instead, assessee allotted shares

to the flagship company after making requisite TDS worth of amount

Rs.17 crores (rounded off) out of total sum payable of Rs.100.32 crores.

This amount is credited to the Government too as per the TDS

provisions. There is no dispute about it. It is not known as to why

assessee did not allot shares to the supplier of the know-how, i.e. MBAG

and instead, allotted the shares to the DBAG, the flagship company?

Assessee could not demonstrate before us specifying the reasons as to

why the assessee did not allot shares to the supplier of the know-how.

It is also not known as to under what circumstances, the MBAG

mandated the assessee to allot the shares to DBAG. Further, it is not

known if the liability of MBAG is discharged or not till day. Ld. Counsel

could not file the book entries if any on this issue in the books of

account of the supplier of the know-how. In any case, the assessee

failed to actually pay the money to MBAG and the liability was not

discharged by way of payment of actual money to the MBAG. Further,

it is also not known as to why MBAG waived of part of the consideration

payable in the context of acquiring of the know-how. DM 19 million was

waived of for some unknown reasons and net amount is Rs.100.32

crores only. Assessee considered the same as deduction u/s.35AB of

the Act, deductible in various assessment years commencing from

1995-96 onwards. The following chart shows the transaction among

MB India Ltd., MBAG and DBAG :

DBAG MBAG, Germany (100% subsidiary of MBAG) (supplier of technical know-how)

worth Shares allotted Rs.100.32 cr worth Rs.110.32 cr. Assessee or MB India Ltd. or DCIPL

With this legal and factual background of the issue, we proceed to

explain if the expression “paid” used in the sub-section (1) of section

35AB covers this arrangement of assessee in not paying the money at

all to the supplier MBAG and allotting of shares equivalent of Rs.100.32

crores to the DBAG, the flagship company of the assessee.

B. Meaning ‘Paid’, ‘Actually paid’ Etc.: During the proceedings

before us, Ld. Counsel for the assessee submitted that the expression

‘paid’ used in the sub-section (1) of section 35AB is broad enough to

include the transactions under scrutiny involving the element of shares

to the DBAG who is not the actual supplier of the know-how. Know-

how is actually supplied by the MBAG. It is an admitted fact that the

assessee did not make the payment in cash/banking channels to the

MBAG, the supplier of the know-how. It is also an admitted fact that

the assessee did not allot any shares leave alone worth of Rs.100.32

crores to the supplier of the know-how. The allotment is done to the

DBAG. Nothing is brought to our notice to demonstrate the reasons for

making this kind of allotment to DBAG.

Interpreting the meaning of the expression ‘paid’, Ld. Counsel

submitted that the said expression is generic in nature and wide

enough to accommodate the above transactions under consideration. It

is the case of the Ld. Counsel for the assessee that wherever the actual

payment of money/banking channel is involved, the expression ‘actually

paid’ is used in other sections of the Act. In this regard, he brought our

attention to the provisions of section 35ABA, relating to ‘expenditure for

obtaining the right to use spectrum for rendering services’. In the

section, the following expression is used when it came to allowing the

claim of deduction, i.e. ‘………………… for which the payment has

actually been made to obtain a right to use spectrum.’ Further, he

brought our attention to the provisions of section 43 relating to

‘definitions of certain terms relevant to income from profits and gains of

business or profession’ and submitted that clause (2) defines the term

‘paid’ and the same is extracted here as under :

(2) " paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head" Profits and gains of business or profession"

This definition of ‘paid’ is applicable to the provisions of section 35AB of

the Act. Relying on various decisions including the decision of Kalyani

Steels Ltd. Vs. DCIT reported in 59 TTJ 316 and others, Ld. Counsel for

the assessee submitted that ‘paid’ means ‘actually paid’ or ‘incurred’

according to the method of accounting.

‘paid’ always means ‘actually paid’ or ‘incurred’ refers to squiring up the

liabilities by way of book entries. In the assessee’s case, as per the AO,

the amount is not ‘actually paid’ to the supplier or incurred on accrual

basis involving the supplier. The allotment of shares is done to the

DBAG who has nothing to do with the supply of the know-how to the

assessee. Further, it is the case of the Revenue that even if it is deemed

as shares allotted to the MBAG, supplier of the know-how, it is a case of

‘exchange’ of technical know-how against the allotment of shares and

the same is outside the scope of the expressions ‘paid’ or ‘actually paid’,

as the case may be.

‘paid’, we are of the opinion that the expression ‘paid’ is already defined

in the statute which means ‘actually paid’. The use of the expression

‘actually paid’ in section 35ABA of the Act is necessary in the context of

actual payment and not otherwise. Therefore, the expressions used in

section 35AB and the expression ‘actually paid’ in section 35ABA has to

be interpreted after considering the definition specifying the said

expression ‘paid’ in section 43(2) of the Act. If the same is considered,

in our view, the shares so allotted by the assessee cannot be considered

as allotted towards the liability to the MBAG, the supplier of the

company. Ld. Counsel for the assessee could not demonstrate as to

why the shares were allotted to the DBAG and if the said allotment was

done for squaring up of any liabilities between MBAG to DBAG. On this

issue, it is a failure to discharge the onus from the assessee’s side.

Notwithstanding the same, we also find if the allotment of shares

constitute exchange of shares against acquisition of know-how.

Normally, the exchange occurs between the parties with reference to the

goods. It may involve money worth and certainly not the money alone.

In effect, the payment becomes relevant issue only with reference to the

money wherever the squaring up of the entries are involved on accrual

basis, the expression ‘incurred’ was used in the provisions of section

43(2) relating to definition ‘paid’. In the instant case, the assessee has

neither paid nor allotted shares to the supplier of the know-how.

Therefore, we are of the opinion that the arguments raised by the Ld.

Counsel for the assessee are not legally sustainable on this issue.

Accordingly, the same are dismissed.

C. Any Lump sum consideration :Coming to the meaning of the

expression ‘any lump sum consideration” used in the provisions of

section 35AB of the Act, the assessee relies on the provisions of section

269A relating to the definition of ‘apparent consideration’. The said

definition was given in relation to any immovable property transferred

or exchange or taken on lease etc. The same does not imply to define

the expression ‘any lump sum consideration’ used in the provisions of

section 35AB of the Act. Further, Ld. Counsel referred to the definition

‘consideration vide the Contract Act, (supra) and we find the same is

different qua the expression ‘expenditure’ within the meaning of ‘any

lump sum consideration’ if it covers the impugned transaction of

allotment of shares to the DBAG, who is the sister concern. It is a case

where assessee never paid money directly to the supplier of the

technical know-how or allotted equivalent value of shares to the

supplier. In our view, it is not a straight case of making

payment/allotting shares to the supplier of the technical know-how.

The expression ‘consideration’ is not synonymous with the word

expression ‘expenditure’ used in section 37(1) of the Act despite the fact

the title of section 35AB refers to the word expression ‘expenditure’.

D. Liberal Interpretation : Regarding the arguments linked to the

liberal interpretation of the provisions of section 35AB of the Act, it is

our observation that the said provisions are obviously deduction

oriented provisions. The onus is on the assessee to demonstrate the

facts leading to the applicability of the said section. As detailed in the

preceding paragraphs of this order the information relating to the

relationship between the DBAG and MBAG are not coming forth from

across the borders. It is an admitted fact that the reasons are absent as

to why the shares were allotted to the non supplier of the technical

know-how. We understand had the assessee eventually allotted the

shares directly to the supplier, our inference could have been different.

The payment by way of allotment of shares is never to the supplier of

the technical know-how in this case which makes inapplicability of the

principle of liberal interpretation to the facts of the present case. The

transactions between the assessee on one side and the MBAG and

DBAG on other side are not transparent so far as the transactions

between the MBAG and DBAG are concerned.

E. Judgment in the case of EIMCO K.C.P. Ltd. : Further, the

applicability of the decision of Hon’ble Supreme Court in the case of

EIMCO KCP Ltd., reported in 242 ITR 659 (SC), we find the Ld. Counsel

for the assessee is right in stating that the said decision was delivered

in the context of the provisions of section 37(1) of the Act qua the

‘expenditure’ and the ‘revenue expenditure’. Facts of this case include

that the said company was floated originally by the American company

as well as Indian company. The technical know-how was supplied to

the Indian company against which shares were allotted by the Indian

company directly to the Foreign company in lieu of transfer of technical

know-how. Allotment was not for the sister concern of the American

company. The facts of this case are not applicable to the case on hand

where the distinguishable facts include (1) the applicability of provisions

of section 35AB of the Act; (2) the shares were allotted to the other

group concern (DBAG) of the supplier (MBAG) and not to the supplier of

the technical know-how; (3) absence of facts/information leading the

supplier of the know-how to allot the shares by the assessee company

to the DBAG etc. In any case, this decision was relied upon by the AO

out of context. Therefore, it is our categorical finding that the AO and

the CIT(A) erred in relying on this judgment which is delivered in

connection with the ‘expenditure’ or otherwise and the ‘Revenue

expenditure’ or otherwise.

Further, on the application of ratio of Judgment of Hon’ble

Karnataka High Court in the case of Amco Power Systems Ltd.,

Judgment of Hon’ble Bombay High Court in the case of Raymond Ltd.

and the order of the Tribunal in the case of Kalyani Steels Ltd. (supra),

we find these decisions were delivered in the context of payments to the

supplier of the technical know-how whereas the facts of the present

case differ in principle as the shares were allotted not to the supplier of

the company but to group concern of the supplier. Further, there is no

information on the reasons which led the assessee to make allotment of

shares to DBAG and not to the supplier MBAG.

F. Regarding the Ld. Counsel’s observation about linking the issue

to the Tribunal orders for the A.Yrs. 1996-97 and others are concerned,

we find the observation linked to the method of accounting is a casual

observation and it does not provide any conclusive ratio which is useful

for adjudication of the present appeal. Therefore, the same are

dismissed as infructuous.

From the above analysis from various angles, i.e. (a) the

provisions of section 35AB of the Act; (b) the meaning ‘paid’ and

‘actually paid’; (c) any lump sum consideration; (d) liberal

interpretation; (e) judgment in the case of EIMCO K.C.P. Ltd.; and (f)

linking the issue to the Tribunal orders for A.Y. 1996-97 and others, we

find the facts relating to not squaring up the liability directly with the

supplier-MBAG and allotment of shares to the DBAG are peculiar to the

factual matrix of this case. In effect, the supplier did not receive any

payment literally to its account either in the form of cash or in the form

of kind from the assessee. As such, it is the admitted position that

there is no direct case law on any one of the issues discussed in (a) to (f)

above. Therefore, we are of the opinion that despite the laborious

arguments made by the Ld. Counsel for the assessee, the ground No.1

raised by the assessee need to be dismissed. Accordingly, the Ground

No.1 of the assessee’s appeal is dismissed.

During the assessment, assessee wrote off an amount of

Rs.9,79,25,979/- as an allowable capital work in progress. The same

relates to disallowance of expenditure in relation to write off of capital

work in progress due to discontinuation of India Car Model W-124.

Relevant facts include that the assessee (MB India) is engaged in the

manufacturing and sale of Mercedes Benz passenger cars in the Indian

market. Various cars were brought through semi knocked down (SKD)

or completely knocked down (CKD) condition to be assembled and sold

in India. There was a Joint Venture agreement between Daimler

Chrysler AG and TELCO in F.Y. 1994-95 in this regard and the assessee

planned to introduce W 124 series cars. The machinery required for

setting up of the manufacturing activity were imported and assessee

commenced the activity of manufacturing of the vehicles to some extent.

Necessary approvals from the Director General of Foreign Trade were

also obtained. However, part of the machinery remained to be installed

and the same was not done. Meanwhile, due to uncertainty of demand

in the market for Model No. W-124, the assessee could not meet the

targets. Assessee approached the Ministry of Industry to amend its

project import certificate for procuring the remaining assets. The part

machinery, which was remained to be installed, were discarded and the

project was aborted after obtaining permission from the regulatory

authorities. Thus, a sum of Rs.9,79,25,929/- was written off

considering the same as deduction while computing the total income of

the assessee for the year under consideration. The said write off was

certified by the Tax.

constitutes a capital loss and not allowable as deduction. AO rejected

the contention of the assessee that the write off should be considered as

capital loss u/s.45 of the Act eligible to be carried forward for set off in

future. The CIT(A) upheld the disallowance on the basis that

expenditure incurred with a view to acquire a capital asset and

therefore, needs to be treated as capital expenditure.

made various arguments and filed the written submissions. For the

sake of completeness, the relevant parts are extracted as under :

“72. Income under the head “Profits and Gains of Business or Profession” is to be computed as per provisions of section 28 of the Act (i.e. the charging section). It has been principally held in numerous judicial precedents that expenditure/losses incurred in connection with business operations are deductible in deriving profits/income of that business even in cases where the same may not be explicitly provided in the Act.

against 20/day) would have resulted in underutilization of capacity which would lead to inefficiency and losses  More manpower to run and maintain the assembly line (Proposed 82 workstation as against the required 25 work station)  Excessive cycle time due to low volume as it would require to pass 82 workstation taking 24 minutes as against 7.2 minutes per operator.  Modification and installation cost were very high (around Rs 2 crores). This required change in the power grid from 380 volts to 415 volts etc.  Further the installation demanded major modification to accommodate change of line from W124 series to W 210 series.

In view of the above commercial expediency and to avoid future business losses, MB India decided to discard the parts of the machinery, forming part of CWIP, procured for industrialization phase. Thus, due to abandonment of the plans for industrialization, the parts of the machinery could not have been of any use to result in enduring benefit for the Appellant. Hence, it is our humble submission that the same should be treated as business loss of the Appellant incurred due to commercial expediency.

placed his reliance on the following judgmental laws giving brief details

of the findings in those cases :

Thus, it is the case of the Ld. Counsel for the assessee that in a

case where assessee had a proposal to expand business into different

product lines of manufacturing of Cars, i.e. W-124 and when the project

has to be aborted for the reasons of business operations of the assessee,

such expenditure although capital in nature, is required to be allowed

as business expenditure for the year under consideration. The said

expenses are allowable u/s.37(1) of the Act. Referring to the cases

referred above, he submitted that in all those cases aborted expenses,

which may be capital in nature, are found as allowable deduction

u/s.37(1) of the Act.

AO/CIT(A). Essential core argument of the Revenue is that the said

expenses being capital in nature are not allowable expenses against the

business income of the assessee. Otherwise, Ld. DR did not submit

that the car services W-124 is not part of the business of the assessee.

the Revenue as well as the decisions relied on by the Ld. Counsel for the

assessee. Essentially, the case of the revenue is that the expenditure

of Rs.9,79,25,979/- related to the car series of W-124, constitutes the

capital expenditure with enduring nature. CIT(A) held it so as per the

reasoning given in Para No.3.3 of his order. The details are extracted as

follows :

“3.3 The submissions have been considered. Admittedly the expenses incurred by the appellant was for plant and machinery (capital asset) for the use in the proposed new factory. The expenses no doubt was capital in nature. An expenditure incurred with a view to acquire capital asset must be treated as a capital expenditure. In Fancy Corpn. Ltd. Vs. CIT 162 ITR 827 (Bom.) it was held that the mere fact that attempt to acquire capital asset failed, would not change the capital nature of the expenditure. The decision in Alembic Chemical Works Ltd. 177 ITR 377 (SC) relied upon by the Appellant’s Representative is not applicable to the facts of the case. In that case the decision was in regard to the improvisation in the process and technology which was supplemented to the existing business. In the case of the appellant it is a direct expenses for acquiring new capital asset. In 196 ITR 845 (Cal.) the expenditure on miscellaneous expenses and law charges incurred on proposed factory project was held as deductible expenses. But in the case of the appellant the expenses was squarely incurred for the purchase of machinery for the production of W 124 series of Mercedese Benz Cars. This is beyond doubt expenditure incurred for capital asset. Therefore, the claim of the deduction of capital expenses is not allowable is therefore rejected.”

However, the above finding is given by the CIT(A) against the assessee

without considering the following legal propositions existing at the

relevant point of time. It is the case of the assessee that the Project

Industrial Production Phase, i.e. starting a new factory for

manufacturing passenger car series W-124 model was abandoned as it

could not penetrate the market and generate the targeted sales.

Further, the assessee’s counsel cites that when the assessee wrote off

the factory layout expenses in the A.Y. 1999-2000, the same was finally

allowed by the Tribunal vide order dated 21-01-2009. The write off of

the said sum of Rs.9,79,25,979/- constitutes business loss. Relying on

the various decisions, Ld. Counsel demonstrated that the said claim is

allowable as the project failed to take off eventually. Referring to the

Calcutta High Court judgment in the case of M/s. Binani Cement Ltd.

Vs. CIT ( a case of construction of a new facility which is abandoned at

the work in progress stage), CIT Vs. Anjani Kumar Co. Ltd. 259 ITR 114

(Raj.) (a case where assessee made advance for purchase of agricultural

land for setting up a broiler factory which is eventually abandoned and

therefore advance became irrecoverable), Excel Industries Ltd. Vs. DCIT

86 TTJ 840 (Mumbai) (a case of incurring of project expenses on a new

project which is abandoned claimed as allowable expenses), Lawkim

Ltd. Vs. JCIT 1 SOT 907 (Mumbai) ( a case of acquiring technical know-

how for manufacturing of new line of products which was later

abandoned, CIT Vs. M/s. Idea Cellular Ltd. Appeal No.516 of 2015 –

Bombay High Court ( a case of claim of capital expenditure on project

for setting up of construction of a cell tower which was abandoned due

to non-suitability) etc. Ld. Counsel submitted that in all these cases,

the expenditure was claimed u/s.37(1) of the Act and the same were

allowed eventually. Drawing our attention to the facts of expenditure of

part of machinery, Ld. Counsel submitted that the said machinery was

never installed and capitalized and the same indicates that the asset

never came into existence cannot have any enduring benefit.

decision of CIT(A) given in Para No.3.3 of his order is not complete in all

respect which includes that the CIT(A)/AO never discussed the details

of the said expenditure on one side and applicability of the relevant

legal propositions on the other while deciding the issue by the CIT(A).

It is understood that every case has its peculiar facts but the

philosophy relating to the decision to describe particular expenditure as

capital or revenue is already discussed by the Hon’ble jurisdictional

High Court as well as Hon’ble Apex Court. The legal propositions

described by other High Courts also contribute to the evolution of

thought on this issue. Therefore, in our view, there is requirement of

remanding this issue to the file of AO for want of a decision on facts as

well as application of legal propositions. As such, we never had the

benefit of knowing the details of expenditure amounting to

Rs.9,79,25,979/- aggregated under the head “capital work in progress”.

It is relevant to know what are the details of break-up of the

expenditure on one side and the genuineness of the same on the other.

Neither the AO nor the CIT(A) has examined this angle of the claim of

the assessee. Therefore, in the set-aside proceedings, AO is directed to

examine the same and decide the issue afresh after giving reasonable

opportunity of being heard to the assessee. Accordingly, relevant

ground raised by the assessee is allowed for statistical purposes.

raised by the assessee towards membership fee for Poona Golf Club and

Hyatt Regency New Delhi, for the Managing Director, AO disallowed the

same as non-business expenses and made addition of Rs.25,600/- and

the same was confirmed by the CIT(A).

submissions and submitted that Para No.79 to 86 contain the relevant

discussion, decision of the AO/CIT(A) as well the assessee’s

contentions.

Rs.1,67,600/- to various clubs and hotels for conducting

meeting/conferences for the employees of the assessee. Assessee

claimed the said expenses as business expenses. AO disallowed the

said expenses treating the same as personal in nature and not wholly

for the purpose of business of the assessee. CIT(A) gave part relief to

the assessee and restricted the disallowance to Rs.25,600/-.

same are reproduced here as under :

“83. The company had also incurred expenses for obtaining membership in the Poona Club golf course and Hyatt Regency hotel, Delhi, for benefit of the employees and for conducting meeting and conferences in the hotels. 84. Thus, the above expenditure are incurred purely to serve business purpose of the Appellant. 85. The appellant wishes to rely on the following decisions, where club expenses are allowed as business expenditure:  Otis Elevator Co. (India) Ltd vs CIT (1992) 195 ITR 682 (Bom) (Refer pages 1014 to 1017 of the Paper Book)  CIT vs. Lubrizollndia Ltd (2013) 218 taxmann 69 (Bom) (Refer pages 1018 to 1020 of the Paper Book)  Intervalve (India) Ltd vs ACIT (ITA NO.1812 & 1813/PN/13) (Pune ITAT) (Refer pages 1021 to 1032 of the Paper Book)  Thermax Limited vs. Addl. CIT (ITA No. 1245/PN/2005) (Pune ITAT) (Refer pages 1033 to 1038 of the Paper Book)  Tata Technologies Limited vs JCIT (ITA Nos. 18 & 19/PN/2012, ITA Nos. 36 & 37/PN/2012, ITA Nos. 2114 & 2115/PN/2013, ITA No. 2083/PN/2013) (Pune ITA T) (Refer pages 1039 to 1055 of the Paper Book)  CIT vs. Upper India Steel Manufacturing & Engg. Co. Ltd (2014) 227 taxmann 173 (P&H)  CIT vs. Groz Beckert Asia Ltd (2013) 351 ITR 196 (P&H - FB) 86. Further, in case of a company which is an inanimate person, there could be no justification for disallowance on the ground of personal or non-business component. In support of this, the Appellant would like to place reliance on the following decisions:

 Sayaji Iron & Engg Co. Vs. CIT (2002) (253 ITR 749) (Guj) (Refer pages 1063 to 1067 of the Paper Book)  Ador Technologies Ltd v DCIT (112 TTJ 24) (Pune ITAT) (Refer pages 1068 to 1083 of the Paper Book)  Bajaj Auto Finance Ltd. v DCIT (112 TTJ 437) (Pune ITAT) (Refer pages 1084 to 1090 of the Paper Book)  Bajaj Finance Ltd vs DCIT (ITA No.1175 and 1273/PN/2012) (Pune ITAT) (Refer pages 1091 to 1100 of the Paper Book)

order of the CIT(A) is reasonable and the same may be confirmed.

club expenses, we find that the assessee claimed Rs.1,67,600/- in the

account and the CIT(A) granted part relief to the assessee confirming

the sum of Rs.25,600/- only. On considering the above, we find there is

no dispute on the fact of claim of club expenses of Rs.1,67,600/- in the

account. AO disallowed the same suspecting the personal nature of the

expenditure. AO placed his reliance on the Auditors Report (Para No.8

of the assessment order). As per the discussion given by the CIT(A) in

Para No.5 and its sub-paras, we find CIT(A) restricted the disallowance

to Rs.25,600/- (Golf Course fee of Rs.14,600/- for Dr. Volkar and Shri

Leoffler) and other payment of club membership in respect of Mr.

Thomas Weigand and Dr. Till Becker Defreitas. Considering the

appearance of individual names of the employees, the CIT(A) held that

these are in the nature of personal expenditure. Contents of Para

No.5.3 are relevant. On perusal of the note given by the Ld. Counsel for

the assessee which is extracted above, we find the facts of the decisions

cited by the Ld. Counsel for the assessee are distinguishable. It is not

the case of the assessee that the employees were not benefitted and the

expenditure is wholly and exclusively for the business purposes of the

assessee. For the sake of completeness, we reproduce the finding given

by the CIT(A) in Para No.5.3 of his order and the same reads as under :

“5.3 The submissions have been considered. The expenditure incurred for the annual subscription of the Poona Golf Course of Dr. Volkar and Shri R. Leoffler is clearly the personal expenses of the employees and it has no connection with the business of the appellant. Similar were the expenses in regard to the membership of the two executives for Hyatt Regency, Delhi which are the personal expense of the executives not connected with the business of the appellant but incurred by the appellant. Therefore, the sum of Rs.7,300/-; Rs.7,300/- & Rs.11,000/- are not for the purpose of the business of the appellant and therefore are not an allowable expenses. In regard to the membership of the appellant with Telco Senior Officials Club paid at Rs.10,000/- p.m. is in regard to the sports and recreation facilities availed by the German expatiate employees working for the appellant. Therefore, it is held as expenditure incurred for the staff welfare. The membership of the Chambers with Taj Mahal Hotel, Mumbai is for availing facilities of the hotel in the area called ‘The Chambers’ where the hotel was providing facilities for business assistance and meetings and therefore even that is held as incurred for the purpose of business. The appellant shall get part relief on this ground.”

Considering the above, we find the order of the CIT(A) is fair and

reasonable. Accordingly, this part of ground raised by the assessee is

dismissed.

C.O.No.50/PUN/2004 Arising out of ITA No.1325/PUN/2003 A.Y.1998-99

relocation expenses amounting to Rs.37,80,388/-; (2) travelling

expenses amounting to Rs.47,71,593/-; and (3) Telephone expenses

amounting to Rs.10 lakhs.

by the CIT(A). Revenue is already in appeal on these three issues. We

have already adjudicated them vide ITA No.1325/PUN/2003 and

dismissed all the three issues raised by the Revenue and in favour of

the assessee. Considering the same, we are of the opinion that

adjudication of these issues raised by the assessee becomes an

academic exercise. Therefore, the cross objections raised by the

assessee are dismissed as academic.

partly allowed for statistical purposes. The appeal ITA

No.1325/PUN/2003 of the Revenue as well as the Cross Objection

No.50/PUN/2004 of the assessee are dismissed.

Order pronounced on this 08th day of August, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) �याियक सद�य �याियक सद�य /JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER �याियक �याियक सद�य सद�य लेखा लेखा सद�य सद�य

पुणे Pune; �दनांक Dated : 08th August, 2018 सतीश आदेश क� आदेश क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत

अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. The CIT(A)-III, Pune 4. The CIT(A)-IV, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “A Bench” Pune; 5. गाड� फाईल / Guard file. 6.

आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार आदेशानुसार

स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune