Case Law Details
Brief of the Case
ITAT Delhi held In the case of DCIT vs. M/s. Escorts Construction Equipment Ltd. that we find that this amount represents unpaid sales tax liability and the same was disclosed itself by the assessee as a contingent liability. There is no impact in the Profit & Loss account since the assessee had not claimed any deduction on that account. Therefore, we find that AO could not have made any disallowance on this issue.
Facts of the Case
The assessee company was engaged in the business of manufacturing, trading and renting of construction and material handling equipments. The return of income was e-filed on 25.10.2007 declaring an income of Rs.23,83,41,236/-.The return was processed u/s 143(1) and a demand of Rs.4,30,820/- was worked out to be payable. Meanwhile, it is seen that the assessee’s case was selected for compulsory scrutiny under CASS norms and notice u/s 143(2) was issued on 22.09.2008. Subsequently, notice u/s 142(1) along with questionnaire was issued on 16.06.2009. In response to these notices, the assessee was represented through the AR and filed the requisite details / information. The assessment was completed u/s 143(3) at a total taxable income at Rs.29,53,77,030/- by making various disallowances.
Disallowance on account of unpaid sales tax liability
The AO observed from the annexure to Annual Report that out of the total sales tax liability of Rs.54,17,505/- for AYs 2002-03, 2003-04 & 2004-05 payable to Andhra Pradesh State, the assessee had deposited an amount of Rs.37,73,577/- under protest which was shown under “Loans & Advances”. He find that thus, the assessee had unpaid liability on account of sales tax of Rs.16,43,928/-. This amount was shown under the head “Contingent Liabilities”. The AO asked the assessee to furnish the details but the assessee had not produced any documentary evidence in support of its contention. So the AO disallowed the same being unpaid sales Tex due in the previous years and added it to the total income of the assessee.
Addition on account of development expenses
The AO asked the assessee to give details of development expenses of Rs.19,31,554/- which had been though deferred in the books has been found to have been claimed as deduction as a revenue expense u/s 37(1)and the assessee was asked to show-cause why the same should not be disallowed.
The assessee replied that there was no expenditure during this assessment year under the head ‘development expenses’. The details of the debits showing the nature of expenses were filed and it was reiterated that during the year under consideration, the said sum of money was only the amount written off. The AO did not accept the assessee’s arguments because in earlier years too, the disallowance had been made on this issue and accordingly, he made a disallowance of Rs.24,88,741/- on account of development expenses, whereas the claim of assessee was only to the tune of Rs.19,31,554/-.
Addition on account of Sec.35AB
AO observed that the assessee had paid a sum of Rs.3 crores to M/s. Escorts Limited as per agreement with them in respect of managerial guidance made available to the assessee company on various matters and in support of its claim, the assessee company had also furnished copy of the agreement between the two companies. The AO observed that the assessee company had entered into an agreement with the Escorts Ltd. for the managerial and technical assistance provided by them to the assessee company and the assessee company in turn paid Rs.25 lakhs per month to M/s Escorts Limited. The AO, after going through the provisions of section 35AB, observed that the payment made by the assessee company is nothing but payment made on account of technical know-how and the agreement for the same had been named as ‘Managerial Guidance Agreement’ and in view of the provisions of section 35AB, held the expenditure of Rs.3 crores incurred on managerial and technical assistance as allowable only in six equal instalments and hence, 1/6th of the expenditure i.e. Rs.50 lakhs was allowed in the year under consideration and held that the balance of Rs.2.50 crores as allowable in succeeding five years in five equal instalments.
Contention of the Assessee
Disallowance on account of unpaid sales tax liability
The ld counsel of the assessee submitted that no such unpaid sales tax liability had been accounted for in the books and the disclosure itself indicated that it was a contingent liability (not provided for). Ld. AR further submitted that for a disallowance to be made, it was to be first ascertained whether the assessee had claimed any deduction on that account and then only the disallowance could be considered. The disallowance u/s 43B came into operation only if the assessee claimed any statutory dues as deduction in computing its income under the head “Business”. He, therefore, pleaded to uphold the order of the CIT (A).
Addition on account of development expenses
The ld counsel of the assessee submitted that the Assessing Officer had made an addition of Rs.24,88,741/- whereas the claim made by the assessee was only to the tune of Rs.19,31.554/-. He further submitted that this issue is covered in favour of the assessee by the order of the ITAT for AYs 2002-03, 2003-04, 2005-06 & 2006-07.
Addition on account of Sec.35AB
The ld counsel of the assessee submitted that out of the total legal & professional expenses claimed in the Profit & Loss account at Rs.4,31,38,834/-, a sum of Rs.3 crores pertained to managerial guidance (including technical guidance) on research & development matters paid to Escorts Limited. He submitted that the said amount had been paid in terms of an agreement with the said company i.e. M/s Escorts Limited which was the 100% holding company of the assessee. Ld. AR submitted that the said company had a vast pool of talented manpower, which also catered to the needs of its various subsidiaries/group companies.
He submitted that the AO wrongly interpreted this entire expenditure as ‘expenditure on know how’ and dealt with the same as per the provisions of Section 35AB of the Act. Ld. AR submitted that the AO had misread the terms of the agreement which did not provide for the provision for any technical knowhow by M/s Escorts Limited to the assessee company and the agreement was only for the purpose of providing managerial guidance by making available continuous knowledge and expertise in technical and managerial fields which had been provided by the promoters and senior professionals of M/s Escorts Limited from time to time to the assessee company. Therefore, he pleaded that the ld. CIT (A) has rightly held that no disallowance is called for in respect of this expenditure by treating the same as covered u/s 35AB.
Contention of the Revenue
The ld counsel of the revenue relied upon the orders of the AO.
Held by CIT (A)
Disallowance on account of unpaid sales tax liability
CIT (A) deleted the disallowance. It was held that this amount represents only contingent liability which is not provided in books of account. It has no impact on the Profit & Loss A/c for the assessment year under appeal and therefore no disallowance of such amount can be made while computing the income.
Addition on account of development expenses
CIT (A) delete the addition made by AO. It was held that this issue is covered by the order of the ITAT for AY 2002- 03 and also by the orders passed by his predecessors for other assessment years. He observed that the AO had not pointed out any change in facts in the year under appeal as compared to the preceding assessment years.
Addition on account of Sec.35AB
CIT (A) allowed the appeal of the assessee. It was held that there is nothing to suggest that the arrangement between the appellant and M/s Escorts Limited is for providing a technical know-how by the latter. Thus, there is no justification on part of the Assessing Officer to treat the expenditure as covered by Explanation to Sec 35AB. he parent company, namely M/s Escorts Limited has huge resources both on financial as also in terms of manpower. The holding company has agreed to provide Management Guidance to the appellant of its so that it can function efficiently in it’s respective fields. It is well-known that-in a group of companies, the holding company incurs certain items of expenditure and which in turn are allocated on a fair, reasonable and incidental basis to its subsidiary group companies since the latter are not in a position to incur such expenditure independently on their own. As per the agreement which has been placed on record, the nature of services which are being rendered are in the field of knowledge & Expensive (both technical & managerial) of the corporate heads of Escorts Limited in the areas of Finance, Legal & IR. The genuineness of the expenditure is not in doubt since the AO himself has allowed 1/6th of the expenditure with the further findings that the balance will be allowed in subsequent assessment years
Held by ITAT
Disallowance on account of unpaid sales tax liability
We find that this amount represents unpaid sales tax liability and the same was disclosed itself by the assessee as a contingent liability. We find that there is no impact in the Profit & Loss account since the assessee had not claimed any deduction on that score. Therefore, we find that AO could not have made any disallowance on this issue. Accordingly, we find that there is no infirmity in the order of the CIT (A) on this issue and the same is upheld.
Addition on account of development expenses
We find that this issue is covered against the revenue by the orders of the ITAT dated 08.10.2007 in the assessee’s own case for AYs 2002-03, 2003-04, 2004-05 and 2005-06. The relevant finding of the coordinate Bench of the ITAT in ITA Nos.5687 & 5688/Del/2010 for AYs 2005-06 & 2006-07 order dated 25.02.2011 is as below –
The details of these expenses reveals that these expenses reveal that these were on account of salary, allowances and traveling of employees who are connected with the development of new products and are routine business expenses. As such type of expenditure was claimed by the assessee in earlier year also as revenue expenditure. Since the issue is covered by the decision of ITAT in assessee’s own case for the Assessment Year 2001-02 to 2003-04 and the facts of the case are identical to the facts of earlier years, respectfully following the decision of ITAT in assessee’s own case, we confirm the order of CIT (A).
The facts remaining the same this year too and the ld. DR failing to bringto our notice any change in facts, respectfully following the aforesaidcoordinate Bench order, we uphold the impugned order of CIT (A) on thisissue. It is ordered accordingly. Ground No.1 is rejected.
Addition on account of Sec.35AB
A perusal of the agreement reveals that there is nothing in it to suggest that the arrangement between the assessee and M/s Escorts Limited (100% holding company) is for providing a technical know-how and thus, we agree with the CIT (A) that there is no justification on the part of the AO to treat the expenditure as covered by Explanation to Sec 35AB.
We further find that the genuineness of the expenditure is not in doubt since the AO himself has allowed 1/6th of the expenditure and the balance to be allowed in subsequent assessment years. The assumption of the AO that assessee had incurred expenditure for acquiring technical know-how is at best can be termed as guess-work and is not on the basis of any evidence to contradict the claim of the assessee or borne out of the agreement. We, therefore, hold that as the genuineness of the arrangement with the holding company is not in doubt and since no know-how has been acquired by the assessee, section 35AB is not attracted. Accordingly, we find no infirmity in the order of the CIT (A) on this issue and the same is upheld. This ground is rejected.
Accordingly appeal of the revenue partly allowed.
