Rc/105/1997 Of Commissioner Of Income Tax Hyd v. M/S. Lhyderabad Industries Ltd. Hyd

HON’BLE SRI JUSTICE G. CHANDRAIAH AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C. No.105 OF 1997 ORDER:- (Per Hon’ble Sri Justice G.Chandraiah) At the instance of the Revenue, the Income TaxAppellate Tribunal, Hyderabad Bench-‘A’ had referred the followingtwo questions of law: 1.“Whether, on the facts and in the circumstancesof the case and in law, the ITAT is correct in law inholding that the amount of Rs.22,52,068/- incurred by the assessee in earlier years on investigationinto the feasibility, viability and profitability etc., of acement plant at Sathna so as to diversify itsactivities and written off during the accounting yearrelevant for the assessment year 1988-89 due toabandonment of such project is an expenditureincurred for acquiring ‘know-how’ for the purposesof assessee’s existing business in manufacture ofasbestos product u/s.35 AB?of the case and in law, the ITAT is correct in law inholding that the amount of Rs.22,52,068/- incurred by the assessee in earlier years on investigationinto the feasibility, viability and profitability etc., of acement plant at Sathna so as to diversify itsactivities and written off during the accounting yearrelevant for the assessment year 1988-89 due toabandonment of such project is an expenditureincurred for acquiring ‘know-how’ for the purposesof assessee’s existing business in manufacture ofasbestos product u/s.35 AB? 2.Whether, on the facts and in the circumstances ofthe case, the ITAT is correct in law in holding thatdeduction u/s.32AB is to be allowed on incomefrom dividends from Unit Trust of India as well asInter-corporate dividends which income isassessable under the head ‘other sources’?the case, the ITAT is correct in law in holding thatdeduction u/s.32AB is to be allowed on incomefrom dividends from Unit Trust of India as well asInter-corporate dividends which income isassessable under the head ‘other sources’? 2. The assessee company M/s.Hyderabad IndustriesLimited, formerly known as Hyderabad Asbestos Cement ProductsLimited, carries on business in manufacture and sale of AsbestosCement Products. The company also exports its products andrender technical services and know-how for erection andmanagement of asbestos cement product plants. The assesseeduring the year of account relevant for the assessment year 1988-89 claimed an expenditure of Rs.43,42,185/- relating to thework carried out in respect of an intended cement project as‘Sathna’. The company embarked on investigation into thefeasibility, viability, and profitability etc., of cement plant at‘Sathna’ so as to diversify the Company’s activities. Thisexpenditure was incurred in the earlier years and has been writtenoff in the accounting year relevant for the assessment year 1988-89 and the assessing officer disallowed the said amount observingthat the expenditure incurred in the earlier years has been writtenoff in the relevant previous year on the recommendation of theexperts that the cement project cannot be implemented. The yearof recommendation and the write off of expenditure does notpertain to this year. On filing appeal also, the Commissioner ofIncome Tax-(Appeals) (CIT-(A)), after noting the break up ofexpenditure incurred by the assessee for consultancy, feasibilityreport fee, mining lease, etc., over the years, and after nothing theprovisions of Section 35AB of the Income Tax Act, 1961 (for short“the Act”) and the definition of the term ‘know-how’, observed thatthe expenditure incurred in lumpsum to acquire the know-how inconnection with the searching for discovery and testing of thedeposits (mineral deposits) totalling to Rs.22,52,966/- is allowable,as they fall within the provisions of Section 35AB of the Act andthe assesee would be entitled to write off proportionately of thisexpenditure. On further appeal by the Revenue, the Tribunaluphold the view taken by the CIT(A) on this aspect. 3) Sri S.R.Ashok, Learned senior counsel appearing for theRevenue submits that the work related to an intended cementproject at ‘Sathna’ to diversify the company’s activities of theassessee; that the expenditure incurred was preliminary in natureand relates to earlier years, but the same was sought to be written off in the year under consideration. He contends that under theprovisions of Section 35AB of the Act, a condition to be satisfied isthat the sum should have been paid as lumpsum consideration foracquiring any know-how for use, for the purposes of assessee’sbusiness. This condition was not satisfied in this case, as theexpenditure incurred in connection with the setting up of a newcement plant cannot be termed as expenditure on ‘know-how’ foruse for the purposes of assessee’s business. The other conditionto be satisfied is that the assessee should have paid the lumpsumconsideration in the relevant previous year, in which the 1[st] instalment of deduction at 1/6[th] thereof is to be allowed. Hefurther contended that the assessee had not placed any materialevidence to indicate that the expenditure to an extent ofRs.22,52,066/-was in the nature of ‘know-how’ payments within thescope of the explanation to Section 35AB of the Act. 4. Sri S.Ravi, learned counsel for the assessee contends thatthe expenditure to an extent of Rs.22,52,066/- was in the nature of‘know-how’ payments and fall fully within the scope of explanationto Section 35AB of the Act and he placed reliance on the definitionof the term ‘know-how’ and strongly supported the order of theCIT(A) and contended that the assesee is entitled to write off thesame. 5. Having gone through the above submissions, it shows thatsetting up of the cement plant is a new business to the assessee,as it has no existing cement plant and the expenditure in questionhas no relevance to the existing business of the assessee.Further, it shows that in this case the expenditure was incurred inearlier years for the intended new project and such expenditure isbeing written off in the year of account. However, it falls within the scope of nature of ‘know-how’ payments as defined in explanationto Section 35AB of the Act. Further it noticed that the groundsraised by the Revenue in the present reference were not raisedeither before the original authority or the appellate authority. Forthe purpose of disallowing the benefit claimed by assessee, theonly ground that was raised by the Revenue, at paragraph 18 ofthe order of the Tribunal, is as under:- “We have considered the rival submissions, andperused the impugned order of the CIT(A). It is the contentionof the learned Departmental Representative, that setting up ofa cement plant is a new business of the assessee, as it hasno existing business of the assessee. On the other hand, thelearned counsel for the assessee, placing reliance on thedefinition of the term ‘know-how’ strongly supported the orderof the CIT(A).” 6. In this connection, it is relevant to mention the definition ofthe term ‘know-how’ mentioned in explanation to 35AB of the Act. It reads as follows:- “ Any industrial information or technique likely to assistin the manufacture or processing of goods or in the working ofmine, oil well or other sources of mineral deposits (includingthe searching for, discovery or testing of deposits or thewinning of access thereto.)” Having gone through the above definition, this Court feelsthat the expenditure incurred in lumpsum to acquire know-how inconnection with the searching for discovery of testing of thedeposits (mineral deposits) totalling to Rs.22,52,066/- as referredto above, fall within the scope of Section 35AB of the Act and theassessee is entitled to write off proportionately of thisexpenditure. This finding arrived at by the Revisional authorityand the appellate authority including the appellate Tribunaldeserves to be upheld. Therefore, the question No.1 is answered infavour of the assessee and against the revenue. Having gone through the above definition, this Court feelsthat the expenditure incurred in lumpsum to acquire know-how inconnection with the searching for discovery of testing of thedeposits (mineral deposits) totalling to Rs.22,52,066/- as referredto above, fall within the scope of Section 35AB of the Act and theassessee is entitled to write off proportionately of thisexpenditure. This finding arrived at by the Revisional authorityand the appellate authority including the appellate Tribunaldeserves to be upheld. Therefore, the question No.1 is answered infavour of the assessee and against the revenue. 7. In sofaras the question No.2 is concerned, as it is rightlysubmitted by the learned counsel for the assessee that the issueis covered by the judgment rendered by the Supreme Court in Apollo Tyres Limited Vs.Commissioner of IncomeTax,Kochi[[1]]which was also followed by the Tribunal in consideringthe above case. Therefore, the question is answered infavour ofthe assessee and against the Revenue. 8. Accordingly, the Referred Case is disposed of. No order asto costs. Miscellaneous Petitions, if any, pending in this ReferredCase shall stand disposed of. ________________ G. CHANDRAIAH,J _______________________ CHALLA KODANDA RAM, J Date:12-11-2013. Nvl