Commissioner Of Income Tax, ... vs M/S Modi Olivetti Ltd
2013 Latest Caselaw 5104 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD
 
 

A.F.R.
 
Reserved on : 8.7.2013
 
Delivered on :19.8.2013 
 
Court No. - 32
 

 
Case :- INCOME TAX APPEAL No. - 143 of 2005
 
Appellant :- Commissioner Of Income Tax, Meerut & Another
 
Respondent :- M/S Modi Olivetti Ltd
 
Counsel for Appellant :- D. Awasthi
 

 
Hon'ble Sunil Ambwani,J.

Hon'ble Surya Prakash Kesarwani,J.

(Delivered by Hon'ble Surya Prakash Kesarwani,J )

1. This appeal has been filed by the Revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'Act') relating to the assessment year 1991-92. The appeal was admitted vide order dated 24.9.2007 on the following substantial questions of law : -

"(1) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the disallowance of Rs.77,16,120/- under the head advertisement expenses, following the judgements of the Hon'ble Apex Court which did not at all apply to the instant case ?

(2) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the disallowance's of Rs.33,77,573/- under the head provisions for warranties ?

(3) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the ddisallowance's of Rs.49,37,042/- on account of provisions for royalty, ignoring the provisions of Section 40(a)(i) of the Income Tax Act, 1961 ?

(4) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in confirming the order of the CIT (A) in deletion of Rs.82,352/- out of entertainment expenses ?

Question No.1

2. The respondent-assessee is a company engaged in the business of manufacturing of Mini Computers / Micro Processor based systems etc. and filed the return of income for Assessment Year-1991-92 declaring a loss of Rs.4,73,69,920/-. During the previous year the Assessee had spent a sum of Rs.77,16,120/- towards advertisements with respect to launching of a new product. In the books of accounts he had capitalized the entire amount and out of that debited a sum of Rs. 29,51,909/- to the profit and loss account claiming the same as deduction. In the computation of income the assessee added back Rs.29,51,909/- to the profit as per profit and loss account and claimed deduction of the entire sum of Rs.77,16,120/- as advertisement expenses. The Assessing Officer rejected the claim on the ground that since the assessee has admittedly capatalized Rs.77,16,120/- in the balance sheet and therefore there is no justification for claiming it as a revenue expenditure. The Assessee preferred an appeal before the Commissioner of Income Tax(A) contending that expenditure of advertisement was revenue expenditure and was to be allowed as a deduction. It was submitted that under the Income Tax Act, there is no concept of deferred revenue expenditure and what is contemplated is that an expenditure is either capital or revenue expenditure, and that even the Assessing Officer accepted that this expenditure was a deferred revenue expenditure. The CIT(A) upheld disallowance of Rs.77,16,120/- and further held that Rs. 29,51,909/- is also not allowable as deduction as it has been voluntarily offered for taxation in the computation of income by the Assessee. Aggrieved with the order of the Commissioner of Income Tax(A), the Assessee preferred an appeal before the Income Tax Appellate Tribunal Delhi Bench 'E', New Delhi which allowed the appeal recording the finding of fact that the advertisement expenses incurred by the Assessee is revenue expenditure. The Income Tax Appellate Tribunal held as under :

"The Honourable Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT [1980] 124 ITR 1 has observed as under:

' There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.'

From the perusal of the aforesaid observations of the Apex Court, it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act.

As regards the relevance of accounting method followed by the assessee, we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered as different from the one followed for the purpose of computing the total income under the Income Tax Act. In any case, as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. V. CIT [1971] 82 ITR 363, the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entires made in the books of account, which are not decisive or conclusive in this regard.

The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct the AO to delete the addition of Rs.77,16,120/- made to the total income. Thus grounds 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds 1.1, 1.2 and 1.4."

3. We have heard Sri Dhanajnay Awasthi, learned counsel for the appellant. No one appear for the respondent-assessee despite notices sent by registered post. We have perused the office report dated 18.1.2013 and 22.3.2013, and find the service of notice on the respondent to be sufficient.

4. Sri Dhanajnay Awasthi reiterates the findings recorded by the Assessing Officer and the Commissioner of Income Tax(A). He submits advertisement expenditure as dealt by the appellant in the accounts i.e., showing Rs.29,51,909/- as revenue expenses and Rs.77,16,120/- as deferred revenue expenses, was fully justified and since Rs.77,16,120/- was capatilized by the assessee, the same was not allowable as expenditure for assessment year in question.

5. We find that neither the Assessing Officer nor the CIT(A) has disputed the revenue nature of the advertisement expenses of Rs.77,16,120/-. There is no dispute that such expenses is allowable expenditure. Merely because the assessee has firstly shown the entire amount in the books of accounts as deferred revenue expenditure and thereafter debited Rs.29,51,909/- in the profit and loss account cannot be made a ground to disallow the advertisement expenses of Rs.77,16,120/- when indisputably in the computation of income, the assessee has claimed the entire sum of Rs.77,16,120/- after adding back Rs.29,51,909/- to the profit as per profit and loss account. While considering this issue the Tribunal has recorded the following findings in paragraph Nos. 10, 11, 12, 13 and 14 of the impugned order : -

"10. We have considered the rival submissions. A copy of the computation of the total income for the A.Y.91-92 is placed at page 20-21 of Assessee's paper book. Perusal of the same indicates that the Assessee had debited a sum of Rs. 29,51,909/- in its profit and loss account and this sum was added back to the profit as per profit and loss account and the entire sum of Rs.77,16,120/- was claimed as deduction. By disallowing the entire sum of Rs. 77,16,120/- the AO has in effect disallowed a sum of Rs. 29,51,909/- in excess of what has been claimed by the Assessee as deduction. The disallowance at best could have been only Rs.47,64,211/- (Rs.77,16,120/- Less Rs.29,51,909/-) for the reason that even as per the AO the expenditure to the extent of Rs.29,51,909/- was of a revenue nature as the benefit from incurring this expenditure resulted in benefit to the Assessee to that extent during the previous year. Be that as it may. We may now consider the concept of deferred revenue expenditure. The reason for making the addition by the revenue authorities below as capital expenditure was mainly for the reason that the assessee had treated the same as "deferred revenue expenditure" in its books of account and according to the Revenue authorities the said expenditure incurred on Advertisement would result in benefits which will accrue to the Assessee over a period of time beyond the previous year. So far as the treatment given by the assessee- company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. In this regard, we find that the assessee has treated the said expenditure as "deferred revenue expenditure" considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below, however, considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that if indicated the accrual of advantage to the assessee of enduring nature. Before we consider the relevance of the test of enduring benefits for ascertaining the nature of expenditure, it would be appropriate to find out the meaning and nature of the term "deferred revenue expenditure". The institute of Chartered Accountants of India in its guidance-note issued on the "terms used in financial statements" has defined the term "deferred revenue expenditure" as the expenditure for which payment has been made or liability has been incurred in a particular year, but which is carried forward on the presumption that it will benefit over a subsequent period or periods. The Institute of Cost and Management Accountant has defined the said term in its publication as an expenditure incurred during the accounting period but not fully charged against income in that period, the balance being carried forward and charged in the next or a subsequent period. From the perusal of these definitions, it is abundantly clear that there is nothing to indicate that the concerned expenditure has to be of capital nature for the purpose of treating the same as deferred revenue expenditure. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital filed but the same accrues only in the revenue filed. As a matter of fact, the very purpose of categorizing certain expenditure differently under the head "Deferred revenue expenditure" for the purpose of drawing financial statements appears to be that the said expenditure even though is of revenue nature results into benefit of enduring nature to the assessee and the same, therefore, deserves a different treatment in terms of preparation of the annual accounts to determine, inter alia, the profit of a particular period year as the benefit thereof accrues over a period exceeding the accounting year in which the same are incurred. It is thus clear that when any expenditure is treated as a "deferred revenue expenditure", it presupposes that the concerned expenditure, creating benefit in the Revenue field, is a revenue expenditure but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. It is thus clear that the authorities below misconstrued the term "deferred expenditure" as capital expenditure on the basis of accounting treatment given by the assessee in its books of account and proceeded to draw an adverse inference without considering the nature of the impugned expenditure as its allowability of the same under the provisions of the Income -Tax Act.

11. "The Honourable Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT [1980] 124 ITR 1 has observed as under:

' There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.'

12. From the perusal of the aforesaid observations of the Apex Court, it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act.

13. As regards the relevance of accounting method followed by the assessee, we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered as different from the one followed for the purpose of computing the total income under the Income Tax Act. In any case, as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. V. CIT [1971] 82 ITR 363, the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entires made in the books of account, which are not decisive or conclusive in this regard.

14. The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct the AO to delete the addition of Rs.77,16,120/- made to the total income. Thus grounds 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds 1.1, 1.2 and 1.4."

6.Learned counsel for the appellant has failed to point out any error of fact or law in the impugned order of the ITAT on the point of allowability of advertisement expenses of Rs.77,16,120/-. We also do not find any error in the aforesaid findings recorded by the ITAT. In the case of CIT Vs. Woodward Governor India Private Limited [(2009) 13 SCC 1 Page 1] vide paragraph no. 24, 25 and 33, the Hon'ble Supreme Court has held that Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of business or profession should be allowed in computing the income chargeable under the head "profits and gains of business". The word "profit" implies a comparison between the state of business at two specific dates, usually separated by an interval of "12 months". In the case of Commissioner of Income Tax, Mumbai Versus Walfort Share and Stock Brokers Private Limited (2010) 8 SCC 137 para 38, Hon'ble Supreme Court has held that the scheme of Sections 30 to 37 is that profits and gains must be computed subject to certain allowance for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred in business. A deduction for expenditure for loss which is not within the prohibition must be allowed if it is on the facts of the case a proper debit item to be charged against the incomings of the business in ascertaining the true profits.

7. We find that the Assessing Officer and the CIT (A) have not disputed the nature of advertisement expenses to be revenue expenditure. The ITAT has also recorded the finding of fact to this effect as quoted above, and as such we are of the view that there is no error in the order of the ITAT in setting aside the addition made by the Assessing Officer on account of advertisement expenses.

8. In result the Question No. 1 is answered in negative i.e. in favour of the assessee and against the revenue.

9. As per assessee, one year warranty is offered on each computer manufactured and sold by it to purchasers and in terms thereof the assessee provide free maintenance including replacement of parts within one year from the date of sale / installation of computers. It estimated the liability in respect of the warranty for the year in question at a sum of Rs. 42,87,667/-. For the previous year relevant to Assessment Year 1990-91 the assessee had provided for a sum of Rs.9,10,094/- towards estimated liability on account of warranty. There was no actual expenditure incurred in the assessment year 1991-92 in respect of such provision of warranty relevant to Assessment Year 1990-91. The assessee therefore wrote back this liability; debited Rs.9,10,094/- relating to Assessment Year 1990-91 and claimed a net warranty liability in the Assessment Year 1991-92 for Rs.33,77,573/- ( Rs.42,87,667.00 - Rs. 9,10,094.00) . The warranty amount was computed at 1.5% of the cost of sales in respect of computers sold within the country and 5% of the cost of sales in respect of computers exported. The Assessing Officer disallowed the entire amount of Rs.33,77,573/- on the ground that it is inadmissible being unascertained, unincurred and contingent in nature. Aggrieved, the assessee filed an appeal before the CIT (A) who confirmed the addition made by the Assessing Officer. The CIT(A) observed that the provision for warranties is a contractual liability which will crystalise only if a complaint is received from the customer. If no complaint is received from the customer, no expenditure is to be incurred. Aggrieved with the order of the CIT(A) the assessee preferred an appeal before the ITAT which was allowed by the impugned order holding that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day and the estimation by the assessee on its liability is reasonably certain. To reach to the aforesaid finding, the ITAT applied the principles of law settled by the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT 245 ITR 428 (SC) and the judgment of Privy Council in the case of Commissioner of Inland Revenue Vs. Mitsubishi Motors New Zealand Ltd.(222 ITR 697 PC). The ITAT has recorded the following findings in paragraph 22 : -

22. The basis of computation of the warranty for the AY 90-91was 1.5% of the total cost of sales. In the AY 91-92, which is the year in dispute in the present appeal, the provision has been made @ 1.5% of the cost of sales in respect of goods sold with the country and 5% on export sales. The assessee also wrote back the provision made for the AY 90-91, from the estimated liability for AY 91-92 and the difference alone is sought to be claimed as a deduction while determining the income for Assessment Year 91-92. Even for the subsequent A.Y. the provision on account of liability under warranty has been made on a scientific basis. Whatever provision have been made for a particular assessment year in excess the actual expenses incurred in the subsequent A.Y., the difference is again been written back in the subsequent assessment year. In the light of the circumstances a legal obligation to make a payment in future can be said to have accrued. It is not required to wait for the contingency to occur. We can infer that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day. The estimation by the assessee of its liability is reasonably certain. In the circumstances it can be said that the liability is in presenti to be discharged at a future date and not a contingent one. We, therefore, direct the A.O. To allow a sum of Rs.33,77,573/- claimed as deduction by the assessee.

10. Similar controversy has been settled by the Hon'ble Supreme Court in the case of Rotork Controls India Private Limited Vs. Commissioner of Income Tax, Chennai ( 2009) 13 SCC 283 wherein the question of allowability of warranty provision was considered. In the said judgment the Hon'ble Supreme Court, vide paragraph Nos. 4, 21, 22, 23, 33, 40 and 41 has held as under : -

"4. For the assessment year 1991-92, the assessee made a provision for warranty at Rs.10,18,800/- at the rate of 1.5% of the turnover. This provision was made by the assessee on account of warranty claims likely to arise on the sales effected by the appellant and to cover up that expenditure. It may be noted that since the provision made was for Rs.10,18,800/- which exceeded the actual expenditure, the appellant reversed Rs.5,00,246 as Reversal of Excess Provision. Consequently, the assessee claimed deduction in respect of the net provision of Rs.5,18,554/- which was disallowed by the A.O. on the ground that the liability was merely a contingent liability not allowable as a deduction under Section 37 of the Income-tax Act, 1961 (the 1961 Act", for short). This decision was upheld by CIT (A). The matter was carried in appeal to the Tribunal by the appellant.

21. We quote hereinbelow the relevant provisions of the Income Tax Act, 1961 as it stood at the material time :

37. General-(1) Any expenditure (not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession.

40A. Expenses or payment not deductible in certain circumstances -

(7)(a) Subject to the provisions of Clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.

(b) Nothing in Clause (a) shall apply in relation to:

(i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year;

(ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely:

(1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason;

(2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976; and

(3) a sum equal to at least fifty per cent of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977.

Explanation 1.-For the purposes of sub-clause (ii) of clause (b) of this sub-section, "admissible amount" means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent of the salary [as defined in clause (h) of rule 2 of Part A of the Fourth Schedule] of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made.

Explanation 2.-For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.

22. What is a provision? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized.

23. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole.

33. In our view, on the facts and circumstances of the present case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case.

40. We may add a caveat. As stated above, the principle of estimation of the contingent liability is not the normal rule. As stated above, it would depend on the nature of business, the nature of sales, the nature of the product manufactured and sold and the scientific method of accounting being adopted by the assessee. It will also depend upon the historical trend. It would also depend upon the number of articles produced. As stated above, if it is a case of single item being produced then the principle of estimation of contingent liability on pro rata basis may not apply.

41. However, in the present case, it is not so. In the present case, we have the situation of large number of items being produced. They are sophisticated goods. They are supported by the historical trend, namely, defects being detected in some of the items. The data also indicates that the warranty cost(s) is embedded in the sale price. The data also indicates that the warranty is attached to the sale price. In the circumstances, we hold that the principle laid down by this Court in Metal Box Co. of India will apply."

(emphasis supplied by us )

11. Applying the principles of law laid down by Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. (supra) and Rotork Controls India Pvt. Ltd. (supra), we find that the conclusion reached by the ITAT does not suffer from any infirmity. Accordingly, we answer the question no.2 in negative i.e. in favour of the assessee and against the revenue.

12. The Assessing Officer disallowed and added back to the income of the assessee Rs.49,37,042/- on account of royalty as unascertained liability. The Assessing Officer rejected the explanation of the assessee. The provision for royalty was made at Rs.47,70,089/- which is exclusive R&D Cess of Rs.1,66,953/-. The aggregate of both the amount is Rs.49,37,042/- is shown in the balance sheet. The CIT(A) upheld the addition made by the Assessing Officer. The ITAT found that in the books of account relevant to the Assessment Year 1991-92, the assessee had made a provision for royalty payable for the period 1.1.1990 to 31.3.1991 at Rs.47,70,089/- and R&D Cess at Rs.1,66,953/-. The tax deductible on this payment amounting to Rs.14,31,028/- was duly shown as deduction in the books of account on 31.3.1991. Later on, the actual amount payable to the collaborator in terms of the collaboration agreement was worked out at Rs.44,77,151/- and R&D cess at Rs.1,56,700/-. This amount was paid in the previous year relevant to the A.Y. 1992-93 i.e. in November, 1991. At the time of making payment, tax deductible on this payment namely a sum of Rs. 13,43,145/- was duly deposited to the credit of the Central Government within the time specified under the provisions to Chapter XVII B of the Act. After considering the facts of the case and the provision of Section 40(a)(i) of the Act as it existed at the relevant point of time, the ITAT came to the conclusion that as per provisions of Section 40(a)(i) the Tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head "Profits and gains of business or profession" which stands satisfied in the present case inasmuch as the liability to pay royalty had accrued and it was not contingent as held by the Assessing Officer. The quantification had taken place at a later point of time. While making such provision the assessee also made book entires in respect of tax deductible and thus satisfied the condition of deduction and accordingly allowed the claim of the assessee with regard to royalty.

13. Learned counsel for the appellant submits that the provision of Section 40(a)(i) of the Act has not been complied with by the respondent-assessee and as such the Tribunal has erred in setting aside the addition in respect of royalty as made by the Assessing Officer and upheld by the CIT(A).

14. We have considered the arguments raised by learned counsel for the appellants and find that Section 40(a)(i) of the Act provides that royalty payable out side India shall not be deducted in computing the income chargeable under the head of "profits and gains of business or profession" on which tax has not been paid or deducted under Chapter XIII B. From the findings of the fact recorded by the ITAT in paragraph 26 of the order impugned, it is evident that the liability to pay royalty had accrued and was not contingent has held by the assessing officer, while making the provision the assessee had also made book entries in respect of tax deductible. Thus, out of two conditions as mentioned in Section 40(a)(i), namely, "tax has not been paid" or "deducted", one condition, namely, "not deducted" do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. The aforesaid interpretation is also supported by the proviso to section 40(a)(i) which provides that where the tax has been paid or deducted in any subsequent year then the amount of royalty shall be allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, "paid" or "deducted" do not carry the same meaning.

15. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. This provision of Section 40(a)(i) was substituted by Finance Act (No.2), of 2004 which puts the condition that where tax is deductible at source under Chapter XVII B, and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-Section (1) of Section 200, then the royalty shall not be deducted in computing the income chargeable under the head "Profits and gains of business of profession". Thus, subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available under Section 40(a)(i) as it existed during the relevant assessment year i.e. Assessment Year 1991-92. For convenience of interpretation the provision of Section 40(a)(i) as existed at the relevant point of time i.e. during the assessment year 1991-92 and as substituted by Finance ( No.2) Act , 2004 are reproduced below : -

Section 40(a)(i) as existed during the A.Y. 1991-92:-

40. Notwithstanding anything to the contrary in section 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession:",-

(a) in the case of any assessee-

[(i) any interest ( not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B:

Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation : For the purposes of this sub-clause,-

(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of Section 9;

(B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; ]."

Section 40(a)(i) as substituted by Finance (No.2) Act, 2004:-

"Notwithstanding anything to the contrary in sections 30 to (38), the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-

(i) any interest ( not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable, -

(A) outside India; or

(B) in India to a non-resident, not being a company or to a foreign company,

on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200;

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of Section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Explanation.- For the purposes of this sub-clause,-

(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

(B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of Section 9."

16. In view of the discussion made above we are of the view that since the assessee has deducted the tax during the previous year relevant to the assessment year in question i.e. A.Y. 1991-92, the conditionality of Section 40(a)(i) stands satisfied. The finding of the Assessing Officer that the royalty as claimed by the Assessee-Respondent was unascertained liability, has been found to be incorrect by the ITAT. Under the circumstances, we find no error in the impugned order of the ITAT. In result the Question No. 3 is answered in negative i.e. in favour of the assessee and against the revenue.

Question No.4

17. With regard to the dis-allowance of entertainment expenses, the learned counsel for the appellant has submitted that in view of the Section 37(2A) of the Act and the finding recorded by the Assessing Officer, a sum of Rs.82,352/- was not allowed towards entertainment expenses and the CIT (A) has erred in directing to allow it. In this regard the findings recorded by the ITAT in paragraph 43 of the impugned order is relevant which is reproduced below :-

It is in dispute that identical issue had come up for consideration in assessee's own case in the AY 90-91 in I.T.A. No.7010/Del/95 and this Tribunal was please to hold that 30% of the expenses incurred on entertainment was to be treated on account of employee participation. The decision of the Tribunal is in line with the decision of the Hon'ble Delhi High Court in the case of CiT Vs. Expo Machinery Ltd. 190 ITR 676. Respectfully, following the decision of the Tribunal, we uphold the order of the CIT(A) and dismiss the second ground of the appeal of the revenue.

18. We have heard learned counsel for the appellant on this question and perused the records. We find that this issue was decided by the ITAT with respect to Assessment Year 1990-91 and that the ITAT has merely followed its earlier order passed on similar set of facts. Learned counsel for the appellant has failed to point out any material to show that the order of the ITAT in the earlier year on the same question has not been accepted by the department or that an appeal against that order has been filed in this Court or that the facts of the present case are different. We thus find that the department having accepted the order of the Tribunal for preceding assessment year in the case of the assessee itself, cannot be allowed to raise it in the year in question. Accordingly, the Question No.4 is answered in negative i.e. in favour of the assessee and against the revenue.

19. In result all the questions are answered in negative i.e. in favour of the Assessee and against the appellant. The appeal fails and is hereby dismissed. However, there shall be no order as to cost.

Order Date:19.8.2013

Mukesh