P.P.S. Janarathana Raja, J.@mdashThe Assessee has come up on appeal as against the order of the Income Tax Appellate Tribunal, Madras ''A'' Bench, dated 22.06.2004 in I.T.A. No. 1626/MDS/1998 raising the following substantial question of law:
1. Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the expenditure incurred by the Assessee for the purpose of improvement of its products is not allowable u/s 37 but allowable only by way of amortization u/s 35D ?
2. The brief facts of the case are as follows:
The Assessee is a Limited Company registered under the Companies Act and carrying on business of manufacture and export of cloth and knitted fabrics. The assessment year is 1995-96 and the corresponding account year ended on 31.03.1995. The Assessee filed its return of income admitting the total income of Rs. 72,19,931/-. Later, the Assessing Officer sent a notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter called as the "Act"). Then assessment was completed u/s 143(3) of the Act and determined the total income of Rs. 1,17,56,994/-. While determining the total income, the Assessing Officer disallowed the claim of the Assessee in respect of the amount of Rs. 19,04,002/-, paid for undertaking the pre-feasibility study project and finding out a potential partner for processing plant to viz., M/s. Gherzi Textile Organisation, Zurich, Switzerland. Aggrieved by that order, the Assessee filed an appeal to the Commissioner of Income Tax(Appeals). The Commissioner of Income Tax (Appeals) held that the payment is made for setting up of the new industrial unit and therefore, the claim of the Assessee towards deduction is only allowable u/s 35 D of the Act and not u/s 37 of the Act and directed the Assessing Officer to allow deduction u/s 35D of the Act if the conditions are satisfied. Aggrieved by that order, the department filed appeal before the Tribunal and the Assessee filed Cross-Objection. The Tribunal held that the First Appellate Authority has correctly directed the Assessing Officer to give deduction u/s 35D of the Act and dismissed the claim of the Assessee. Aggrieved by that, the Assessee filed the present appeal raising the above question of law.
3. The learned Counsel appearing for the Assessee contended that the Tribunal is wrong in holding that the expenditure incurred will only come u/s 35D and not u/s 37 of the Act. It was further contended that the expenditure is incurred only for the purpose of getting technical know how and also agreed to buy the product. The authorities ought to have looked at the substance rather than the outward appearance. Therefore, the same cannot be considered u/s 35D of the Act and further relied on Central Board of Direct Taxes Circular No. 56 dated 10th March, 1971 which clearly stated the provisions for amortization is not intended to supersede any other provision of the income tax law under which, the expenditure incurred is allowable as a deduction against profits and also relied on judgment in the case of Commissioner of Income Tax ` Carborandum Universal Ltd reported in (2008) 219 CTR (Mad) 202 to support his proposition. He contended that therefore, the order passed by the Tribunal is not in accordance with law and the same may be set aside.
4. The learned Counsel appearing for the Revenue contended that the authorities below came to a correct conclusion that it is not allowable deduction u/s 37 of the Act and it will only come u/s 35 D of the Act. The First Appellant authority as well as the Appellate Tribunal has correctly considered all the relevant materials and came to a correct conclusion that the claim of the Assessee cannot be considered u/s 37 of the Act. Therefore, the order passed by the Tribunal has to be confirmed.
5. Heard the learned Counsel and perused the documents on record. The Assessee entered into an agreement with a foreign consultant viz., Gherzi Textile Organisation, Zurich, Switzerland on 06.01.1995. The said agreement entered for finding out a potential partner for the purpose of expanding the existing business and for establishing a state of the art processing plant which could be the first in South India both to process woven and knitted fabric. Clause 1 of the agreement states that it is the intention of the Assessee to establish the state of the art of processing plant which would be first in South India both to process woven and knitted fabric. Clause 2 of the agreement deals with service object. The object of the partner search is to identify suitable partner for the Assessee Virudhunagar Textile Mills, who would be willing to give technical know-how and preferably buy back and market some of the future production. Clause 4 of the agreement deals with Fee expenses and payment terms. 4.1 deals with fee which reads as follows:
4.1 Fee:
Our fee for undertaking the pre-feasibility study project and partner search will be
Swiss Francs 68''000-
(Sixty eight thousand Swiss Francs)
payable net to our account No. 548.153 11 with the Credit Swiss Bank, town-branch office Zurich-Enge, as follows:
-Swiss Francs 53''000 - as a down payment
-Swiss Francs 15''000 - on completion of the study
The said foreign consultant viz., the Swiss Management Consultants have to render service in accordance with high professional standards and principles of the Association. Clause 5.4 deals with contract coming into force which reads as follows:
The contract will become valid after receipt of a counter-signed copy of this proposal and payment of the first instalment of the fee in accordance to para 4.1 of this contract.
6. Section 35D of the Act deals with Amortisation of certain preliminary expenses and the same reads as follows:
(1) Where an Assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in Sub-section (2)
(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the Assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation:
(2) The expenditure referred to in Sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely:
(a) expenditure in connection with (i) preparation of feasibility report ;
(ii) preparation of project report ;
(iii) conducting market survey or any other survey necessary for the business of the Assessee;
(iv) engineering services relating to the business of the Assessee:
Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the Assessee himself or by a concern which is for the time being approved in this behalf by the Board.
The object and scope of the above provision is explained by the Board in Circular 56 dated 19.03.1971. The said provision was introduced with effect from 01.04.1971 and the same provides for amortisation of certain preliminary expenses incurred by an Indian company or a resident Assessee other than the company before the commencement of business or in connection with the extension of industrial undertaking or setting up of a new industrial unit. It is clear that amortisation be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation. In the case of
Section 35D has been introducted to give benefit to Assessees in cases of capital expenses. When the capital expenses cannot be allowed as deduction in computing the income, but u/s 35D capital expenses can be allowed as deduction in ten year span, i.e., 1/10 in each year. But how a deduction, which is allowable otherwise as revenue expenses, can be denied after the insertion of Section 35D, learned Counsel failed to explain. The Board has also clarified this issue in Circular No. 56, dated March 19, 1971. The Board clarified that the provision for amortisation is not intended to supersede any other provision of the income tax law under which such expenditure is admissible as a deduction or deduction allowable by virtue of the decision of the Supreme Court in
In the present case, the findings given by the authorities that it is a capital expenditure and the same is not allowable u/s 37 of the Act. The authorities have correctly taken the view that the expenditure is allowable u/s 35D of the Act.
7. The learned Counsel for the Assessee further relied on this Court judgment in the case of Commissioner of Income Tax v. Carborandum Universal Ltd reported in (2008) 219 CTR (Mad) 202 to support his case that the expenditure will come u/s 37 of the Act. In the judgment, the issue involved is whether the amount paid for management consultancy is allowable deduction u/s 37 of the Act or not. Paragraph 5 of the said judgment is as follows:
It is well settled that it is not only permissible, but is also necessary for any business to update its own knowledge and adopt better ways of organising its business, if it is to survive in the market. The expenditure incurred for such purpose cannot be regarded as capital expenditure and it is only a revenue expenditure. The Assessee, with an intention of bringing about improvements in the way it did its business, had sought for and obtained reports of the consultant for assessment of market attractiveness in terms of gaining global market, reputise on dealing with global markets, evaluation of Assessee''s business ability to compete, analysis of the future growth trend of the business, development of detailed business strategies for the Assessee to grow in the dynamic business environment. The fees paid to the consultant was disallowed by the Revenue officials as capital expenditure on the premise that the benefits derived from such consultancies would enure to the future years also. According to the learned Counsel for the Revenue, this question of law is covered against the Revenue by the decision of this Court in the case of
Merely obtaining a report from the management consultant and paying the fees therefor, could not be regarded as capital expenditure as such report was not obtained as part of documentation packages, but was obtained in a contract covering comprehensive restructuring of the business involved. No new line of business was started on the strength of the report of the consultants. The report was not regarded as essential part for any new business that the Assessee commenced thereafter. In the circumstances of the case, the expenditure incurred by the Assessee, in obtaining that report was clearly an expenditure of the revenue in character.
Hence, the first question of law is covered against the Assessee.
8. The facts in the present case is entirely different from the above judgment. In the instant case, there were concurrent findings that it is 13 not a revenue expenditure and it is only the capital expenditure. Therefore, the authorities below rightly held that the claim of the assessee falls u/s 35D of the Act. The issue in the above cited judgment is distinct from the facts herein. In the circumstances, the finding given by the Tribunal is based on valid materials and evidence. We do not find any error or illegality in the order of the Tribunal as warrant interference. It is not a perverse order. It is a pure question of facts. In these circumstances, the order passed by the Tribunal is in accordance with law. Hence, we answer the above questions against the assessee and in favour of the Revenue and the Tax Case (Appeal) is devoid of merits and the same is dismissed. No costs.
