The Commissioner Of Income Tax, Coimbatore v. M/S Elgi Ultra Industries Limited, (Formerly Elgi Polytex Limited), Elgi House, Trichy Road, Coimbatore-641 045

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED :19.01.2010 THE HONOURABLE MR.JUSTICE D.MURUGESANANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA TAX CASE (APPEAL) NO.629 OF 2004 The Commissioner of Income Tax,Coimbatore. ... Appellantv. M/s Elgi Ultra Industries Limited,(Formerly Elgi Polytex Limited),Elgi House, Trichy Road,Coimbatore-641 045. ... Respondent Appeal filed under section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal, 'C' Bench,Chennai dated 30.01.2004 made in ITA No.532/Mds/1997 against theorder of The Commissioner of Income tax (Appeals), Coimbatore in ITANo.389/96-97 dated. 08.01.97 against the order of The DeputyCommissioner of Income Tax, Special Range-I, Coimbatore in PAN/GIRNo.CV-2237/SR-1/CBE dated. 18.3.96. For appellant: Mr.T.RavikumarFor respondent : Mr.V.S.Jayakumar JUDGMENT P.P.S.JANARTHANA RAJA,J. The above Tax Case Appeal is filed by the revenue underSection 260A of the Income Tax Act, 1961, against the order of theIncome Tax Appellate Tribunal, Chennai 'C' Bench, dated 30.01.2004made in ITA No.532/Mds/1997. 2. When the above appeal was posted for admission on20.08.2004, this Court admitted the same on the followingsubstantial questions of law: "Whether on the facts and in the circumstances of thecase, the Appellate Tribunal was right in law in holdingthat the expenses incurred to get technical know-how isfully allowable under Section 37 of the Income Tax Act,1961?" https://hcservices.ecourts.gov.in/hcservices/ 3. Assessee is a company engaged in the manufacture of textilemachinery accessories like transmission belts, cots and aprons, loomcomponents etc. The relevant assessment year is 1995-1996 and thecorresponding accounting year ended on 31.03.2005. The assesseefiled its return of income on 29.11.1995 declaring income ofRs.21,39,740/-. The Assessing Officer sent intimation under Section143(1)(a) of the Income tax Act, 1961, on 11.03.1996. Subsequently,notice under Section 143(2) of the Act was issued and assessment wascompleted under Section 143(3) of the Act determining total incomeof Rs.28,41,340/-. While computing the assessment, the assessingofficer disallowed the claim of Rs.7,41,675/- towards technical know-how and he has allowed 1/6 of the amount under Section 35AB of theAct i.e. Rs.1,23,613/-. The balance amount of Rs.6,18,062/- wasdisallowed by the assessing officer. Aggrieved by that order, theassessee has filed an appeal before the Commissioner of Income Tax(Appeals), Coimbatore. The said Commissioner confirmed theassessment and dismissed the appeal. Aggrieved by that order, theassessee has filed an appeal before the Income Tax AppellateTribunal, Chennai. The Tribunal has held that the amount paidtowards technical know-how is a revenue expenditure and allowed theentire amount claimed by the assessee and allowed the appeal. Asagainst that order, the Revenue has filed the present appeal. 4. The learned counsel appearing for the revenue submitted thatthe Tribunal is wrong in allowing the technical know-how expenditureas revenue expenditure under Section 37 of the Income Tax Act, 1961.He further submitted that the Tribunal ought to have appreciatedSection 35AB of the Act, which is squarely applicable to the facts ofthe present case since know-how fees is paid as per the agreementdated 25.09.1994. So, the assessing Officer was justified inrestricting 1/6th of the total amount paid by the assessee anddisallowed the balance portion and in support of his contention herelied on the decision of this Court in the case of COMMISSIONER OFINCOME TAX VS, TAMIL NADU CHEMICAL PRODUCTS LTD., reported in 259 ITR2003 and COMMISSIONER OF INCOME-TAX VS. DRILCOS (INDIA) PVT. LTD.reported in (266 ITR 2004). Therefore, the order passed by theTribunal is not in accordance with law and the same has to be setaside. 5. The learned counsel appearing for the assessee submitted thatonce the expenditure incurred is revenue expenditure, it has to beallowed under Section 37 of the Act and the Tribunal is correct inallowing the said deduction and has also relied on the decision ofthe Apex Court in the case of COMMISSIONER OF INCOME TAX VS. SWARAJENGINES LTD., reported in (2009) 309 ITR 443 in support of hiscontention and the same has to be confirmed. 6. Heard the learned counsel appearing on either side andperused the materials available on record. It is seen from the orderof the Tribunal that it has allowed the appeal by relying on the https://hcservices.ecourts.gov.in/hcservices/ following judgments: (1) CIT Vs. Simpson & Co., Ltd., (239 ITR 83) (2) Jonas Woodhead and Sons (India) Ltd., Vs. CIT (224 ITR 342), (3) Alembic Chemical Works Co., Ltd., Vs. CIT (177 ITR 377) (4) I.A.E.C. (Pumps Ltd.,) (232 ITR 316), In the aforesaid decisions only applicability of Section 37 of theAct has been considered and nowhere the scope of Section 35 AB ofthe Act has been dealt with. The Apex Court in the case ofCOMMISSIONER OF INCOME TAX VS. SWARAJ ENGINES LTD., (2009) 309 ITR443 while considering the scope of Section 35AB, held as follows:"5. On the first question, it has been vehementlyurged by Shri Iyer, learned senior counsel on behalf ofthe respondent-assessee, that the High Court was right indismissing the Department's appeal in limine followingits earlier judgment in the case of CIT v. JCTElectronics Ltd. [2008] 301 ITR 290 (P&H) in I.T.A.No.383/2004. On the first question, there isconsiderable amount of confusion. It appears that priorto the assessment year 1995-96, the Department has beencontending that the royalty expenditure comes within theambit of section 35AB. However, there is some doubt asto whether the said contention regarding applicability ofsection 35AB was at all raised. In this regard, theorder of the Assessing Officer is not clear principallybecause it has focused only on one point, viz., whethersuch expenditure is revenue or capital in nature. At thesame time, it is important to note that even for theapplicability of section 35AB, the nature of expenditureis required to be decided at the threshold because ifthe expenditure is found to be revenue in nature, thensection 35AB may not apply. However, if it is found tobe capital in nature, then the question of amortizationand spread over, as contemplated by section 35AB, wouldcertainly come into play. Therefore, in our view, itwould not be correct to say that in this case,interpretation of section 35AB was not in issue. Ourabove reasoning is further fortified by the questionframed by the High Court in the impugned judgment whichreads as under:"Whether, on the facts and in thecircumstances of the case, the Hon'ble Income-taxAppellate Tribunal is right in upholding thedecision of the Commissioner of Income-tax(Appeals) that the payment of royalty made by theassessee-company to M/s. Kirloskar Oil EngineLtd., to acquire technology know-how under theagreement dated October 19, 1989, is a revenueexpenditure and does not come within the ambit ofthe provisions of section 35AB of the Income-taxAct, 1961, whereas the payment is a capital expenditure in view of the following judgments.(A) Fenner Woodroffe and Co. Ltd. v. CIT [1976]102 ITR 665 (Mad);(B) Ram Kumar Pharmaceuticals Works v. CIT[1979] 119 ITR 33 (All); (C) CIT v. Warner Hindusthan Ltd. [1986]160 ITR 217 (AP) ; and(D) CIT v. Southern Switchgear Ltd. [1984] 148ITR 272 (Mad)"6. On a bare reading of the said question, it is clearthat applicability of section 35AB in the context ofroyalty paid to Kirloskar as a percentage of the net saleprice being revenue or capital in nature and depending onthe answer to that question, the applicability of section35AB also arose for determination before the High Court.Be that as it may, the said question needs to be decidedauthoritatively by the High Court as it is an importantquestion of law, particularly, after insertion of section35AB. Therefore, we are required to remit the matter tothe High Court for fresh consideration in accordance withlaw.7. On the second question, we do not wish to expressany opinion. It is for the High Court to decide, afterconstruing the agreement between the parties, whether theexpenditure is revenue or capital in nature and,depending on the answer to that question, the High Courtwill have to decide the applicability of section 35AB ofthe Income-tax Act. On this aspect we keep allcontentions on both sides expressly open." From a reading of the aforesaid decision, it is clear that theSupreme Court directed the High Court first to decide the matterwhether the expenditure incurred is revenue or capital expenditure.After construing the agreement entered into between the parties anddepending on the result, the High Court has to decide theapplicability of Section 35AB of the Act. In the present case,absolutely there is no details regarding technical know-how paymentand also there is no discussion by any of the authorities below thathow the technical know-how is the revenue expenditure. There iscomplete lack of details in respect of agreement entered into betweenthe assessee and the foreign corroborator and the revenue has notenclosed the copy of the said agreement. In view of the absence ofdetails and discussion in the order, it is difficult for this Courtto determine whether the expenditure incurred towards technical know-how is the revenue or capital expenditure. The authorities below havenot given any details regarding the technical know-how payment. Inthese circumstances, the order passed by the Tribunal is set asideand the matter is remitted back to the Income Tax Appellate Tribunal,"C" Bench, Chennai, to decide the matter afresh in accordance with https://hcservices.ecourts.gov.in/hcservices/ law as expeditiously as possible, after giving opportunity to theassessee. 7. The above Tax Case Appeal is allowed and the matter isremitted to the Income Tax Appellate Tribunal, "C" Bench, Chennai,to decide the matter afresh in accordance with law and in light ofthe above judgments, after taking into consideration theobservations made in this decision. No costs. Sd/- Asst.Registrar /True Copy/Sub.Asst.RegistrarraaTo1) The Income Tax Appellate Tribunal, Chennai Branch, III Floor, Rajaji Bhavan, Besant Nagar, Chennai - 902) The Commissioner of Income Tax (Appeals) Spl. Range I, Coimbatore.3) The Commissioner of Income Tax Coimbatore.4) The Deputy Commssions of Income Tax (Appeals) Special Range I, Coimbatore+ 1 CC to Mr.J.Naresh Kumar,Standing Counsel for IT.SR.3050+ 1 CC to Mr.V.S.Jayakumar,Advocate,SR.2899 T.C.(A) No.629 of 2004 TEJ (CO)ss (29.01.2010) https://hcservices.ecourts.gov.in/hcservices/