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The Companies Act, 1956
Cit, Ernakulam vs P.K. Noorjahan (Smt) on 15 January, 1997
Section 41(1) in The Companies Act, 1956
Section 43A in The Companies Act, 1956
Section 37 in The Companies Act, 1956

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Income Tax Appellate Tribunal - Indore
Eicher Motors Ltd. vs Deputy Commissioner Of Income Tax ... on 31 May, 2002
Equivalent citations: (2004) 82 TTJ Indore 61
Bench: I Sudhir, T Sood

ORDER

I.C. Sudhir, J.M.

1. In these appeals, preferred by the assessee and the Department, some common issues have been raised. These are, therefore, disposed of vide a consolidated order.

2. ITA No. 533/Ind/95 (Asst. yr. 1990-91) The first appellate order has been impugned by the assessee, a public limited company, on the following grounds:

(1) That the CIT(A) has grossly erred on facts and in law in confirming the disallowance of royalty payment of Rs. 52.23 lacs.

(2) That the CIT(A) has grossly erred on facts and in law in confirming the disallowance to the extent of Rs. 55,569 out of interest paid:

(3) That the CIT(A) has grossly erred oh facts and in law in confirming addition of Rs. 14,36,026 towards provision for bad debts and Rs. 2,67,011 towards provision for gratuity to the profit of the appellant company in arriving at the book profit under Section 115J.

(4) That the order under Section 250/143(3) dt. 9th May, 1995, of the CIT(A) is bad in law and needs to be quashed.

Besides the above the learned authorised representative also prays for allowing the following additional ground filed on 15th March, 1999, for consideration of the Tribunal while deciding the present appeal: "That, on the facts and in the circumstances of the case, the appellant should be held entitled to deduction of Rs. 1,05,75,000 on account of actual payment of funded interest."

3. The learned authorised representative submits that the financial institutions had agreed to fund the overdue interest upto 31st March, 1989 aggregating to Rs. 2,89,67,325 in the term loan on 25th Oct., 1989, and in the return for 1989-90. the assessee had claimed deduction under Section 43B of the Act for the entire funded interest on the ground that as a result of the aforesaid sanction, of the financial institutions, the entire funded interest got converted into loan and was, therefore, paid in terms of the said sanction.

3.1 The lower authorities denied the claim. The Tribunal vide order dt 31st Aug., 1998, confirmed the action of the lower authorities oh the ground that (i) there was no actual payment, and (ii) the agreement with financial institutions was entered into after the due date for filing the return of income for the asst. yr. 1989-90.

3.2 The learned authorised representative submits that the aforesaid additional ground of appeal arises pursuant to the order of the Tribunal holding that the deduction under Section 43B of the Act in respect of the funded interest was not admissible for the asst. yr. 1989-90 and that vide this additional ground, the assessee is seeking to claim deduction for the instalment of funded interest (term loan) paid during the relevant previous year and upto the date of filing the returned income. He submits further that the additional ground does not require any fresh investigation into the facts and cites the following decisions in support:

(i) Jute Coporation of India Ltd. v. CIT (1991) 187 ITR 688 (SC)

(ii) National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC)

He also refers contents of Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963 and submits further that the order of the Tribunal is a material on record on the basis of which additional ground has been raised and refers para 19 of the order of the Tribunal in the aforesaid case. He submits further that even in case of mixed question of law and fact for consideration of which no fresh material is required, can be raised as additional ground. He refers the following decisions in support :

(i) K. M. Sugar Mills Ltd. v. ITO (1987) 27 TTJ (All) 34 : (1986) 18 ITD 581 (All)

(ii) Maruti Udyog Ltd. v. ITAT (2001) 252 ITR 482 (Del)

(iii) Kathiawar Coal Distributing Co. v. CIT (1958) 34 ITR 182 (Bom)

(iv) CIT v. Hindustan Commercial Bank Ltd. (1980) 122 ITR 645 (All).

3.3 The learned senior Departmental Representative, on the other hand, opposes the prayer of the assessee to allow the additional ground for consideration of the Tribunal on the basis that new facts would be required to adjudicate the proposed additional, ground. He cites the following decisions :

(1) Moti Ram v. CIT (1958) 34 ITR 646 (SC)

(2) ManjiDana v. CIT(1966)60 ITR 582 (SC)

(3) Indian Steel & Wire Products Ltd. v. CIT (1994) 208 ITR 740 (Cal)

(4) CIT v. Commonwealth Trust (India) Ltd. (1996) 221 ITR 474 (Ker)

(5) CIT v. Karamchand Premchand (P) Ltd. (1969) 74 ITR 254 (Guj)

He submits further that no such claim was raised by the assessee before the lower authorities and the assessee indirectly seeks direction from the Tribunal for other years. He also refers contents of pp. 7759 and 7766 of the book Law of Income tax authored by Chaturvedi & Pithisaria. The learned senior Departmental Representative also points out that on this issue reference application under Section 256(1) of the Act in RA No. 177/Ind/98 is pending disposal before the Hon'ble High Court for the asst. yr. 1989-90. He submits further that the assessee had sufficient opportunity to raise the additional ground before the lower authorities as the assessment order was passed on 31st March, 1993, and the first appellate order has been passed on 9th May, 1995. He submits that the additional ground should not be allowed to be raised. He cites the decision of the Hon'ble Supreme Court (Allahabad High Court) in the case of Cawnpore Chemical Works (P) Ltd. v. CIT (1992) 197 ITR 296 (All).

3.4 The learned authorised representative rejoins the reply with the submission that the facts on record have been defined by the Hon'ble Supreme Court in the case of Mahendra Mills Ltd. v. P.B. Desai, AAC (1975) 99 ITR 135 (SC). He also refers the provisions laid down in Rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963 and cites the following decisions :

(1) Atlas Cycle Industries Ltd. v. CIT (1982) 133 ITR 231 (P&H)

(2) CIT v. Mahalakshmi Textiles Mills Ltd. (1967) 66 ITR 710 (SC)

(3) CIT v. Karamchand Premchand (P) Ltd. (1969) 74 ITR 254 (Guj)

(4) CIT v. Orient Prospecting Co. (1983) 141 ITR 301 (Guj)

(5) Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 351 (Bom)

(6) CIT v. Indian Express (Madura) (P) Ltd. (1983) 140 ITR 705 (Mad)

(7) CIT v. Kerala State Co-op. Mktg. Fedn. Ltd. (1992) 193 ITR 624 (Ker)

(8) CIT v. Cellulose Products Of India Ltd. (1985) 151 ITR 532 (Guj)(FB)

He submits further that the decisions of the Kerala High Court in the case of CIT v. Commonwealth Trust (India) Ltd. (supra) and the decision of the Hon'ble Calcutta High Court in the case of Indian Steel & Wire Products Ltd. v. CIT (supra) relied on by the leaned senior Departmental Representative are not applicable to the present appeal as they do not deal with issue of additional ground. He cites the decision of the Hon'ble Delhi High Court (FB) in the case of Taylor Instrument Co. (India). Ltd. v. CIT (1992) 198 ITR 1 (Del). He states further that likewise the decision of the Hon'ble Supreme Court in the case of CIT v. Ram Kumar Aggarwal & Bros. (1994) 205 ITR 251 (SC) relied on by the learned senior Departmental Representative does not deal with the power of the Tribunal.

3.5 We have considered the arguments advanced by the parties and have gone through the decisions cited by them on the admissibility of additional ground. It appears from record that during the last asst. yr. 1989-90 the lower authorities had disallowed deduction for the funded interest under Section 43B of the Act and the Tribunal vide its order dt. 31st Aug., 1998, in ITA No. 65/Ind/94 had confirmed the action of the lower authorities on the ground that (i) there was no actual payment, and (ii) the agreement with financial institutions was entered into after the due date of filing the return of income for the asst. yr. 1989-90. The submission of the learned authorised representative is that present additional ground of appeal has arisen pursuant to the order of the Tribunal holding that the deduction under Section 43B of the Act in respect of the funded interest was not admissible for the asst. yr, 1989-90 and the assessee is now seeking to claim deduction for the instalment of funded interest (term loan) paid during the relevant previous year and upto the date of filing the return of income.

3.6 After consideration of the arguments of both the parties, we find force in the submission of the learned authorised representative as the proposed additional ground has arisen due to fulfilment of aforesaid two requirements during the year relevant for the assessment year under consideration, for adjudication of which no fresh material is required since there is no dispute on the facts but the dispute is as to whether the assessee under the present facts and circumstances is entitled to have deduction for the funded interest under Section 43B of the Act, a pure question of law. We also find support from the decision of the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. v. CIT and Anr. (supra) wherein it was held that it is the discretion of AAC to allow a ground for its adjudication which could not have been raised at an earlier stage as the ground became available on account of changed circumstances or law. The Hon'ble Supreme Court even in the case of National Thermal Power Co. Ltd v. CIT (supra) was pleased to hold that the question of law arising from the facts owned by the Income-tax authorities and having a bearing on the tax liability of the assessee, raised for the first time before the Tribunal, the Tribunal had jurisdiction to decide such question. The Hon'ble Delhi High Court in its Full Bench decision in the case of Taylor Instrument Co. (India) Ltd v. CIT (supra) was pleased to hold that fresh ground can be raised before the Tribunal under Rules 11 and 29 of the Income-tax (Appellate Tribunal), Rules, 1963. The Hon'ble Court upheld the validity of these provisions under Article 265 of the Constitution of India. The Hon'ble Court was of the view that where no fresh evidence is required to be taken, there was no reason why the additional ground should not be entertained. The Hon'ble Kerala High Court in the case of CIT v. Kerala State Co-operative Marketing Federation Ltd (supra) and the Hon'ble Punjab and Haryana High Court in the case of Atlas Cycle Industries Ltd. v. CIT (supra) were of the same view on this issue. The decisions relied upon by the learned Senior Departmental Representative on the contrary are not relevant as having different facts and issue. The Hon'ble Supreme Court in the case of Motiram v. CIT (supra) relied on by the learned senior Departmental Representative, was pleased to hold that the Tribunal has full jurisdiction and it is in its discretion to refuse permission to an appellant to raise for the first time before it new question of fact which cannot be decided without taking further evidence. Similar is not the case in the present matter as there is no dispute on facts but the dispute is as to whether on fulfilment of the aforesaid two requirements i.e., (a) actual payment and (b) entering the agreement with the financial institutions during the year relevant for the assessment year, the assessee is entitled to deduction for the funded interest under Section 43B of the Act or not. Likewise in the case of CIT v. Orient Prospecting Co. (supra) relied on by the learned senior Departmental Representative, the Hon'ble Gujarat High Court: was pleased to hold that the additional grounds must relate to the subject-matter of the appeal and in the guise of raising additional grounds on new item of subject-matter cannot be allowed to be introduced under Rule 11, Several other judgments have also been cited by the learned Senior Departmental Representative but after going through these we do not find that these are helpful to the Department having different facts.

3.7 We thus allow the additional; ground raised by the assessed for our consideration and adjudication and in view of the fulfilment of requirements by the assessee during the year relevant for the assessment year under consideration as the financial institutions had agreed to fund the overdue interest upto 31st March, 1989, aggregating to Rs. 2,89,67,325 into term-loan on 25th Oct., 1989, and as result of the sanction of the financial institutions, the entire funded interest was converted into loan, the assessee is very much entitled to deduction of Rs. 1,05,75,000 on account of actual payment of funded interest in terms of Section 43B of the Act. This ground is accordingly allowed with the direction to the AO to accept the claim of the assessee in this regard. Our finding on this additional ground is, however, subject to the decision of the Hon'ble jurisdictional High Court on the reference application preferred against the decision of the Tribunal on the issue between the parties during the asst. yr. 1989-90.

4.1 Ground No. (i). It is related to disallowance of royalty payment of Rs. 52.53 lacs. The facts in brief are that the assessee on 4th Oct., 1982, had entered into technical assistance agreement with Mitusubishi Motors Corporation (in short referred to 'MMC') vide which the assessee had paid Rs. 52.23 lacs during the year as royalty which was disallowed by the AO on the basis that the same was a capital expenditure eligible for amortisation as per the provisions of Section 35A of the Act since the payment of royalty was for acquisition of patents and, copyrights. Vide this agreement MMC had allowed the assessee-company to manufacture or get manufactured vehicles' parts in India and it was to provide, the technical information and know-how for manufacturing of light commercial vehicles by the assessee in India. The MMC had further allowed the assessee to use of the patent right for manufacturing parts in India and in lieu of this patent right and copyright, the assessee had paid aforesaid royalty to MMC. The learned CIT(A) has affirmed the assessment order against which the assessee is in appeal before us.

4.2 The learned authorised representative submits that the present year under dispute is the third year of commercial production as 1988-89 was the, first year of the commercial production. He submits that the agreement dt. 4th Oct., 1982, between the assessee and MMC was entered for the period of seven years wherein the assessee in para 2 has been shown as licensee to use the copyright and, therefore, the provisions of Section 35A of the Act are not attracted. He also invites our attention to the contents of Clause 2 and 3 at p. 3 of the agreement, para 2 p. 5, para 5 p. 6, para 3 p. 10, para 4 p. 11, el. 6 p. 17, paras 4 and 6 p. 18, para 7 p 19 and para 13 p. 23 of the agreement. He further draws our attention that p. 2 of the chart i.e., a summarised form of the agreement wherein it has been shown that under the agreement MMC granted to the assessee (a) an exclusive licence to manufacture local parts and assemble MMC vehicles in the territory (b) an exclusive right to sell in the territory MMC vehicles and spare parts assembled and/or manufactured by the licensee subject to certain conditions and (d) license to use patent and trade marks of MMC in connection with sale of licenced products. Vide this agreement MMC also made available to the assessee use of drawing, design, etc. for manufacture of the licenced products for the duration of the agreement in lieu of which the assessee had to pay lumpsum know-how fee of Rs. 330 million Japanes yen and royalty at 3 per cent of MMC FOB Japanese Port Prices for local parts corresponding to those manufactured by the assessee. The learned authorised representative submits further that where the expenditure is on obtaining access to technical knowledge of the collaborator for a limited duration, the expenditure is of revenue in nature. Where the payment is made for mere right to use, the expenditure is termed to be on revenue account, whereas in case of out-right purchase of know-how, the payment secured transfer of technical know-how in favour of the purchaser, the expenditure is termed as to be capital in nature. The learned authorised representative cites the following decisions :

1. CIT v. Ciba of India Ltd. (1968) 69 ITR 692 (SC)

2 Shriram Refrigeration v. CIT (1981) 127 ITR 746 (Del)

3 Triveni Engineers Works v. CIT (1982) 136 ITR 340 (Del)

4. Asstt. CIT v. Shama Engines Valves, Ltd. (1982) 138 ITR 216 (Del)

5 Alembic Chemical Works Ltd. v. CIT (1989) 177 ITR 377 (SC)

6. CIT v. Indian Oxygen Ltd. (1996) 218 ITR 337 (SC)

7. LAC v. Bajaj Tempo Ltd. (1996) 55 TTJ (Pune)(SB) 43 : (1996) 218 ITR (AT) 147 (Pune) (SB)

8. CIT v. IAE (Pumps) Ltd. (1998) 232 ITR 316 (SC)

9. CIT v. Wavin (India) Ltd. (1999) 236 ITR 314 (SC)

10. S.R.P. Tools Ltd. v. CIT (1999) 237 ITR 684 (Mad)

11. CIT v. Southern Pressing (P) Ltd. (2000) 242 ITR 67 (Mad)

12. CIT v. Kirloskar Tractors Ltd. (1998) 98 Taxman 112 (Bom).

The learned authorised representative submits further that the Hon'ble Courts have in the following cases distinguished between the acquisition/purchase of know-how and use of know-how and held that where transferor retains property rights in the design/secret formulae and allows the use of such right, the same is in the nature of royalty whereas in an outright sale or purchase, the consideration is for transfer of such rights and cannot be termed as royalty as defined in DTA :

1. Citizen Watch Co. Ltd v. IAC (1984) 148 ITR 774 (Kar)

2. CIT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal)

3. Graphite Vicarb India Ltd. v. ITO (1992; 43 ITD 28 (Cal) (SB)

4. Swadeshi Poly Tex Ltd. v. ITO (1991) 38 ITD 328 (Del)

5. DCM Ltd. v. ITO (1989) 29 ITD 123 (Del)

He points out that Section 35A of the Act is an enabling provision entitling the assessee to claim amortisation of expenditure on acquisition of patent rights or copyright which is otherwise capital in nature, the said provisions are not intended to supersede the existing provisions in the statute which allow deduction for payment, which are on revenue account. He submits further the term 'acquisition refers' to obtaining absolute proprietory right in patent right or copyright, as opposed to obtaining mere right to use. The learned authorised representative invites our attention to p. 5 of Chart 6 p. 142 of the paper book wherein the words "acquire" and "acquisition" have been defined as per different dictionaries and Law Lexicons. He also refers the decision of the Hon'ble Supreme Court in the case of Charanjit Lal v. Union of India AIR 1951 SC 41 and in the case of Devidas Gopal Krishna v. State of Punjab AIR 1967 SC 1895 wherein the term acquisition has been defined. He draws our attention to p. 144 of the paper book wherein several decisions of the Tribunal have been referred to with stress to the Third Member decision of the Tribunal in the case of Goodyear India Ltd. v. ITO (2000) 68 TTJ (Del)(TM) 300 : (2000) 73 ITD 189 (Del)(TM) and submits that the amount paid was revenue expenditure under Section 37(1) and the provisions of Section 35AB of the Act have no application as the assessee had only obtained a limited right to draw only technical knowledge of the collaborator during the currency of agreement, the expenditure incurred was not for acquisition of know-how. He also refers the decision of Madras Bench of the Tribunal in the case of M. Subramaniam v. Dy. CIT (1992) 42 ITD 676 (Mad) wherein under similar facts and on identical issue, the amount was held allowable in full as revenue expenditure under Section 37(1) of the Act. The learned authorised representative further submits that the mere right to sub-licence vested in the assessee, that too with prior approval of MMC cannot result in the expenditure being treated as capital expenditure. He also refers the following decisions :

(i) Shriram Refrigeration India Ltd v. CIT (supra)

(ii) Trvieni Engineering Works Ltd v. CIT (supra)

(iii) CIT v. Indian Oxygen Ltd. (1978) 112 ITR 1025 (Cal)

subsequently affirmed by the Hornble Supreme Court in (1996) 218 ITR 337 (SC) (supra).

4.3 The learned senior Departmental Representative on the contrary, banks upon the orders of the lower authorities and submits that allowing the relief in other years by the AO is not binding on the Department as principle of res judicata has no application in the provisions of the IT Act. He submits further that no one has vested right in an erroneous order. He cites the decision of the Hon'ble jurisdictional High Court in the case of Malwa Vanaspati & Chemical Co. Ltd v. CIT (1985) 154 ITR 655 (MP) and that of the Hon'ble Supreme Court in the case of CIT v. Central India Industries Ltd. (1971) 82 ITR 555 (SC). He invites our attention to page No. 3, p, 4 paras 2 and 4, p. 5 Clause 5 and 7, p. 10 paras. 2, 4 and 5, p. 11, p. 13, p. 17 item No. 4, p. 18 paras 1 and 2 and p. 19 para 8 of the agreement dt. 4th Oct., 1982, between MMC and Eicher Good Earth Ltd. He submits that as per Clause 1 p. 3 of the agreement, the assessee had an exclusive licence to manufacture local parts and assemble MMC vehicles in the territory subject to the terms and conditions set out in the agreement and the expenditure on technical assistance, detailed at p. 12 of the agreement for setting up of the plant of the assessee is capital in nature. He submits further that the terms of payment in consideration of rights granted and technical assistance supplied to the assessee, detailed at p. 18 of the agreement, is actually a lumpsum payment. He furnishes an extract of Directors' report dt. 30th April, 1986, wherefrom it appears that agreement expired in May, 1993, and there was no renewal of it thereafter. The learned senior Departmental Representative submits that the first instalment was not dependent on starting of commercial production, payment has not been made in terms of the agreement and refers the contents of p. 2 of the agreement as well as p. 1 of the paper book. In two years the assessee has capitalised the expenditure but later on it has claimed it as revenue in nature being a licensee. He again refers para 10 p. 21, para 13 p. 22, para 3 p. 23, para 6 p. 24, para 3 Clause 7, p. 2 i.e., amended agreement-I placed at pp. 29 to 33 of the paper book, para 6, Clause 6 of p. 4 of the said amended agreement i.e., p. 32 of the paper book and submits that the. agreement was actually for installation of plant and machinery. He also refers para 3 pp. 9 and 10 of the assessment order as well as p. 12 of the first appellate order. The learned senior Departmental Representative cites the following decisions :

1. M.K. Bros. (P) Ltd v. CIT (1972) 86 ITR 38 (SC)

2. Travencore Sugars & Chemicals Ltd. v. CIT (1966) 62 ITR 566 (SC)

3. CIT v. Man Trading Co-op. Ltd. (1985) 155 ITR 536 (SC)

4. Jonas Woodhead & Sons (India) Ltd. v. CIT (1997) 224 ITR 342 (SC)

5. CIT v. Shriram Bearing Ltd: (2001) 251 ITR 155 (Gal)

6. CIT v. Panipat Woolen & General Mills Co. Ltd. (1976) 103 ITR 66 (SC)

He submits further that the object of the payment and not the manner of the payment is to be seen while arriving at the nature of the expenditure. The assessee had acquired exclusive right over the know-how, etc. and, therefore, the payment made was capital in nature. A new company was set up by the assessee on the basis of the agreement in question and it was an enduring benefit therefore, also the expenditure was capital in nature, submits the learned senior Departmental Representative. He also invites our attention to the contents of p. 2135 of the book 'Law of Income-tax'' authored by Chaturvedi & Pithisaria.

4.4 The learned authorised representative submits in rejoinder that the AO at p. 8 of his order has observed that the payment was for user only. He points out that the learned CIT(A) has also observed that drawing was not for setting up of the plant, but for manufacturing of some parts and nowhere from the agreement it appears that it was for setting up of the plant. The agreement became effective after commercial production and, therefore, the expenditure was revenue in nature, submits the learned authorised representative. He submits that the payment made before the commencement of the manufacturing activities, of course, is capital in nature but after commencement of: the commercial production it is revenue in nature. The test of enduring benefit is not an absolute method to arrive at the conclusion that the expenditure is capital. He submits that there were different facts in the case of Jonas Woodhead & Sons (India) Ltd. v. CIT (supra) and Jonas Woodhead & Sons (India) Ltd. v. CIT (1979) 117 ITR 55 (Mad) relied on by the learned senior Departmental Representative. The decision in the case of CIT v. Shriram Bearing Ltd. (supra) was ex parts and there was no occasion for the assessee to present its case before the Hon'ble Court, whereas in the case of Mewar Sugar Mills Ltd. v. CIT (1973) 87 ITR 400 (SC) royalty payment was held to be revenue expenditure. He reiterates that commercial production of the assessee started in the month of May, 1986, and after the end of the agreement MMC name is: not being used by the assessee. He while concluding the submissions, cites the decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC).

4.5 We have carefully considered the arguments advanced by the parties in view of the material available on record and have gone through the order impugned and the decisions quoted by them. The Department has disallowed the deduction on the basis that the payment of royalty was for acquisition of patents and copyrights; hence the same was capital expenditure and eligible for patents amortisation under Section 35A of the Act. From a thorough, reading of the terms of the agreement dt. 4th Oct., 1982, between MMC and the assessee, we find force in the submission of the learned authorised Representative, that the expenditure in question was on obtaining access to technical knowledge of the collaborator for a limited duration and the payment was made as a licensee for obtaining the right to use the know-how and it was not a case of outright purchase of the know-how. We also agree with the plea of the learned authorised representative that there is distinction between the acquisition/purchase of know-how and use of know-how and where transferor retains property rights in the design, Secret formula, etc. and allow the use of such right, the same is in the nature of royalty whereas in an outright sale or purchase, the consideration is for transfer of such rights and cannot be termed as royalty. The assessee having power to sub-licence the right granted by the MMC under the agreement has been emphasized by the AO without appreciating the material fact that such right cannot be exercised without the prior approval of MMC. We have also gone through the comparative chart furnished on behalf of the assessee placed at pp. 152 to 160 of the paper book wherein the facts of different leading cases of Goodyear (supra), Shriram Refrigeration (supra), Triveni Engg, (supra), Ciba of India Ltd. (supra), Alembic. Chemical Works Ltd. v. CIT (1989) 177 ITR 377 (SC) and Indian Oxygen Ltd. (supra) on identical issue has been decided in favour of the assessee, have been compared. There as nothing on record especially in the agreement dt. 4th Oct., 1982, to suggest that the assessee had acquired the know-how including drawing etc. from MMC as an absolute owner. There is a difference between a licensee and an owner since in the case of licensee, there does not occur absolute transfer of interest of seller to thee purchaser in an item whereas in the case of ownership there always is absolute transfer of interest of seller in item to the purchaser. The Hon'ble Courts in the aforesaid cases relied on by the learned authorised representative have gone in detail on the issue while deciding it in favour of the assessee discussing, all the possible aspects of the facts in view of Sections 35A and 37(1) of the IT Act. In a recent case, CIT v. Southern Pressing (P) Ltd. (supra), the Hon'ble Madras High Court has decided the identical issue in favour of the assessee on similar facts as therein also there was five-year agreement for provision of technical know-how for manufacture of air-cleaners and royalty was paid per air-cleaner manufactured. The Hon'ble Court was of the view that the payment was not for acquisition of capital asset rather a revenue expenditure. Likewise in the case of CIT v. Kirloskar Tractors (supra), the Hon'ble Bombay High Court was of the same view. In this case, the assessee had entered into technical collaboration agreement with a German firm to obtain know-how for manufacturing tractors and engines. As per terms and conditions of the agreement, the assessee had a right only to use know-how but could not assign, encumber, let or sublease a right, the assessee was obliged to keep technical document secret. The Hon'ble Court was pleased to hold that the technical know-how continued to be the property of the supplier and the expenditure incurred for getting know-how was allowable as revenue expenditure under Section 37(1) of the IT Act.

4.6 We thus decide the issue involved in ground No. (i) in favour of the assesses. Ground No. (i) is, accordingly, allowed.

5.1 Ground No. (ii) relates to the disallowance to the extent of Rs. 55,569 out of the interest paid. The facts in brief are that the assessee had advanced loan of Rs. 250 lacs to its sister-concern, Eicher Tractor Ltd. (in short 'ETL') on various dates carrying interest @ 15.5 per cent per annum. The AO alleged that the assessee had diverted interest-bearing loan to its associate companies at lower rate of interest i.e., 15.5 per cent instead of 18 per cent per annum and he added differential interest amounting to Rs. 6,25,000 to the income of the assessee, The learned CIT(A) restricted the disallowance of interest to Rs. 55,569 taking the average rate of interest 16.5 per cent per annum on which funds were available to the assessee and directed that the interest to be calculated for the number of days the loan was advanced. Against this first appellate order, the assessee is in appeal before us.

5.2 The learned authorised representative invites our attention to the contents of p. 48 of the paper book i.e. statement showing internal accrual and loan to ETL. He submits that during the year, under consideration, there was profit of Rs. 321.17 lacs after payment of tax. He submits that the assessee had substantial interest-free funds of its own in the form of share capital and advances from the customers out of which the loans were advanced to ETL. The learned authorised representative submits further that the loan in question was given, at the fag end of the year. Therefore, the interest accrued to the assessee was only Rs. 50,321 which was duly offered to tax. He cites the decision of this Bench of the Tribunal in the case of Beta Nephthol (P) Ltd. v. Dy. CIT (1994) 50 TTJ (Ind) 375 and submits that there should be no disallowance of interest on the presumption that the borrowed funds have been diverted to the sister-concern at lower rate of interest. The learned authorised representative points out that there was sufficient fund of around 10 crores available with the assessee and there was interest-free advance of around Rs. 950 lacs from the customers in the form of booking; thus around Rs. 20 crores in total were available with the assessee. He draws our attention to the contents of pp. 10 to 12 of the chart wherein a list of other decisions of the Hon'ble Court as well as of the Tribunal have been given on the issue. He submits further that where the assessee maintains a mixed pool of funds, the appropriation of the funds should be in a manner beneficial to the assessee and the interest free funds should be presumed to have been utilised for making advances to the sister-concern while the borrowed funds should be taken to have been used for business purposes. Without prejudice to the aforesaid submissions, he submits further that various loans and borrowed funds were available with the assessee carrying interest ranging between 9.5 per cent to 16.5 per cent per annum. And average cost of the funds available to the assessee was much below 15.5 per cent per annum and, thus, the learned CIT(A) has erred in taking the average rate of interest in respect of the borrowed funds available with the assessee at 16.5 per cent per annum, He submits further that the addition, if at all should be restricted to Rs. 5,248 considering that the assessee itself had offered Rs. 50,321 for tax being interest accrued @ 15.5 per cent per annum.

5.3 Concluding his arguments, the learned authorised representative further submits that the Department is not in appeal against the relief allowed by the learned CIT(A).

5.4 The learned senior Departmental Representative, on the contrary, justifies the first appellate order and cites the following decisions :

(i) East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 (SC)

(ii) CIT v. Metro General Finance Ltd.

5.5 We, after considering the arguments advanced by the parties, in view of the material available on record and after having gone through the order impugned as well as the decisions relied upon by the parties, find force in the submissions of the learned authorised representative that the Department has failed to establish nexus between the borrowed funds taken by the assessee and the amount advanced to ETL especially when there are sufficient funds available with the assessee. We thus restrict the addition to Rs. 5,248, considering that the assessee itself had offered Rs. 50,321 for tax being interest accrued @ 15.5 per cent per annum. The ground is accordingly allowed.

5.6 Ground No. (iii) relates to the addition of Rs. 14,36,026 towards provision for bad debts and Rs. 2,67,011 towards provision for gratuity to the profits of the assessee-company in the book profit under Section 115J of the Act. The AO while determining the book profit under Section 115 of the Act added Rs. 14,36,026 towards provision for bad debts and Rs. 2,67,011 towards provision for gratuity on the basis that the same were in the nature of contingent liability. The learned CIT(A) has confirmed the addition against which the assessee is in appeal before us,

5.7 The learned authorised representative submits that the book profit for the purpose of Section 115J of the Act is the profit shown in the P&L a/c prepared in accordance with Part-II and III of the Schedule VI of the Companies Act subject to adjustments provided in the explanation thereto. He submits that the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT (1993) 199 ITR (AT) 164 (SB) held that the P&L a/c prepared in accordance with Para II and III of Schedule-VI to the Companies Act cannot be disturbed by the AO for computing book profit under Section 115J of the Act unless it was discovered that the profit and loss was not drawn up in accordance with the provisions of the Companies Act or there be any allegation of fraud or misrepresentation.

5.8 The learned authorised representative submits that the provision for bad and doubtful debts is not in the nature of contingent liability described in Clause (c) of Sub-section (1A) to Section 115J of the Act. He points out that the bad debt had been allowed by the AO while computing the income under the provisions of the Act and has not been considered, as reserve or a contingent liability. He cites the decision of the Delhi Bench of the Tribunal in Modi Rubber Ltd. v. Dy. CIT (ITA No. 3270/Del/92), copy supplied, wherein on similar facts, the Tribunal has held that the provision for bad debts, is not to be added back while computing the book profits under Section 115J of the Act.

5.9 The learned senior Departmental Representative, on the other hand, submits that the amount in doubtful debt is not ascertained and onus lies on the assessee. He cites the following decisions :

1. Dy. CIT v. Beardsell Ltd. (2000) 244 ITR 256 (Mad)

2. CIT v. Echjay Forgings (P) Ltd. (2001) 251 ITR 15 (Bom)

5.10 The learned authorised representative rejoins with the submission that specific date was there, it is not an ad hoc provision and the assessee had option to write off or to make provision. He submits that the provisions of Section 115J of the Act should be construed strictly.

5.11 After considering the arguments advanced by the parties as well as the decisions relied, upon by them and the order impugned, we find substance in the submissions of the learned authorised representative and, accordingly, allow the ground in favour of the assessee with the direction; to the AO to accept the claim of bad debt of the assessee.

5.12 So far as the addition of Rs. 2,67,011 towards provision for gratuity to the profits of the assessee-company in the book profit under Section 115J of the Act; is concerned, the learned authorised representative submits that the provision for gratuity was determined by the assessee on the basis of actual valuation which is an ascertained liability. This provision was a necessary change to the P&L a/c and not an appropriation. He submits further that the Hon'ble Supreme Court in the case of Metal Box Co. of India Ltd. v. .Their Workmen (1969), 73 ITR 53 (SC) held that the estimated liability under a scheme of gratuity, if property ascertained, is deductible from the gross receipts while preparing the P&L a/c Such a provision, their Lordships observed, provides for a liability, the amount of which can be determined with accuracy and it cannot, therefore, be, termed as a reserve. He also cites the following decisions :

1. CIT v. Echjay Forgings (P) Ltd. (supra)

2. Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC)

5.13 The learned senior Departmental Representative banks upon the assessment order in this regard.

5.14 After considering the arguments advanced by the parties in view of the material available on record and after having gone through the order impugned as well as the decisions relied upon by them, we find substance in the submission of the learned authorised representative that the provision for gratuity was determined by the assessee on the basis of actual valuation which is an ascertained liability. We, accordingly, allow the ground in favour of the assessee with the direction to the AO to allow the claim of the assessee deleting the addition made on account of provision for gratuity.

5.15 Ground Nos. (iv) and (v) are general in nature which need no separate adjudication.

5.16 In the result, the appeal is allowed.

6. ITA No. 553/Ind/95--The first appellate order has been impugned by the Department on the following grounds :

(i) On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 27,50,000 being 50 per cent of service charges paid by the assessee to M/s Richer Good Earth Ltd. even when the assessee could not justify the business expediency of the expenditure incurred during the year.

(ii) On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition made by the AO under Section 41(1) of Rs. 7,41,903.

(iii) On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition made by the AO under Section 37(4)/(5) of Rs. 1,50,086 being expenses on rent, repairs and depreciation on guest-house.

6.1 Ground No. (i)--The facts in brief are that a sum of Rs. 55 lacs was incurred by the assessee on service charges for the services rendered by Eicher Good Earth Ltd. (EGL) in connection with R&D services and corporate services provided by EGL to the assessee pursuant to the agreements entered into with EGL. The AO disallowed 50 per cent of the service charges i.e., Rs. 27,50,000 invoking the provisions of Section 40A(2)(b) of the Act as being excessive and unreasonable having regard to the legitimate needs of the assessee which has been deleted by the learned CIT(A).

6.2 The learned senior Departmental Representative justifies the assessment order in this regard, He submits that the onus is on the assessee to establish the claim and there are two agreements but there is no clarity in the terms of the agreement. He refers page Nos. 13, 14 and 36 to 38 of the paper book filed by the assessee. He also refers page Nos. 6 and 8 of the annual report 1991-92 and page Nos. 7 and 8 of the annual report 1990-91 and submits that a large number of components were indigeneous and there were technical absorption, adoption and innovation. He draws our attention to the contents of paras 5 and 7 of the first appellate order and submits that only broad details are referred instead of specific details nor has the assessee given details of the specific services to justify the business of the assessee. He refers the contents of page Nos. 2134 and 2125 of the book 'Law of Income-tax' authored by Chaturvedi & Pithisaria. He also cites the following decisions :

(i) V.S. Malhotra v. Union of India (1973) 88 ITR 110 (Del)

(ii) Swadeshi Cotton Mills Co. Ltd. v. CIT (1967) 63 ITR 57 (SC)

(ii) Lachminarayan Madan Lal v. CIT (1972) 86 ITR 439 (SC)

6.3 The learned authorised representative, on the other hand, banks upon the first appellate order and submits that the AO has on the basis of surmises and conjectures concluded that the assessee has got its own training and R&D facility at Pithampur and that the assessee had availed all sorts of services from MMC. He submits that the assessee-company and EGL do not stand in a relation so as to attract the mischief of Section 40A(2) of the Act and this section is attracted in a transaction between two companies only in the following situations :

(i) The recipient company has a substantial interest in the business of the paying company (assessee)

(ii) A director of the recipient company has a substantial interest in the business of the assessee; and

(iii) The paying company (the assessee) or any director or any relative of such director of the company has substantial interest in the business of the recipient company.

He draws our attention to the contents of pp. 9 and 10 of the paper book and submits that in the assessee's case EGL held only 2.25 per cent of the issued share capital of the assessee-company, none of the directors of EGL has substantial interest in the business of the assessee-company and the assessee does not have substantial interest in EGL nor does any director or any relative of the directors of the company has a substantial interest in EGL.

6.4 Without prejudice to the aforesaid submissions, he points out that for invoking Section 40A(2) of the Act, the onus is on the AO to bring on record comparable cases to show that the expenditure incurred was excessive or unreasonable having regard to the legitimate needs of the assessee. He refers page Nos. 128 to 132 of the paper book wherein type of service rendered by EGL to the assessee have been detailed with decisions supporting the case of the assessee. He points out that Section 40A(2) has been introduced on the statute to prevent diversion of income between the related entities to avoid payment of taxes as clarified by the CBDT vide Circular No. 6-p dt. 6th July, 1968, He submits further that there is no allegation by the Revenue for diversion of income. The AO is questioning only the quantum of services and genuineness of services have not been doubted. He refers decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT (supra) and submits that consistency in the approach of the Department under similar facts must be maintained. He submits further that the decisions of the Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT (supra), Lachminarayan Madan Lal v. CIT (supra) relied on by the learned Departmental Representative are not on the issue and, therefore, are not applicable to the present case. The learned authorised representative while concluding his arguments submits further that it is not the jurisdiction of the AO to interfere with the quantum of expenditure incurred on the services.

6.5 We have considered the arguments in view of the material available on record and have also gone through the order impugned as well as the decisions relied on by the learned authorised representative at pp. 128 and 129 of the paper book. We find substance in the submissions of the learned authorised representative. The learned CIT(A) has deleted the addition on the basis that the provisions of Section 40A(2)(b) of the Act are not applicable to the facts of the case and considering the nature of services rendered. He observed further that the payment does not appear to be excessive or unreasonable as during the asst. yrs. 1988-89 and 1989-90 service charges paid for the period 30th April, 1987 and 30th April, 1988 amounting to Rs. 30.4 lacs and Rs. 49.09 lacs, respectively. The order of the learned CIT(A) is comprehensive and reasoned one. We thus, do not find any reason to interfere with the same. In the result, ground No. (i) is rejected.

7.1 Ground No. (ii) relates to deleting the addition made by the AO under Section 41(1) of Rs. 7,41,903.

7.2 The facts in brief are that the AO had made addition of Rs. 7,41,903 under Section 41(1) of the Act comprising of Rs. 4,42,351 payable to Gannon Dunkerly & Co. Ltd. and an amount of Rs. 2,79,552 payable to Jay Coach Enterprises Co. Ltd. on the basis that there was cessation of liability and the amounts were not payable since no case or legal dispute was pending in respect thereto. The learned CIT(A) has deleted the addition accepting the submissions of the assessee that there was no cessation of liability. Against this, the Department is in appeal.

7.3 The learned senior Departmental Representative refers the contents of para No. 4 p. 10 of the assessment order as well as of page Nos. 17 and 18 of the paper book filed by the assessee on 11th July, 2002. He submits further that here in the present case contractual liability was there. He also refers page No. 15 of the paper book i.e., a letter dt. 29th Jan., 1993, and submits that in this letter only Rs. 2 lacs and odd has been mentioned in place of Rs. 4 lacs and odd in the order of the learned CIT(A). The learned senior Departmental Representative submits further that Section 41(1) of the Act is an enabling provision for bad debt and the assessee has not shown the nature of the debt. He cites the decision of the Hon'ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar & Sons Ltd (1996) 222 ITR 344 (SC) wherein the unclaimed balance transferred to P&L a/c was held to be assessable as income.

7.4 The learned authorised representative, on the other hand, submits that the amount of Rs. 4,42,351 due to Gannon Dunkerly & Co. Ltd. was in respect of carrying on of civil works for setting up the assessee's plant and retained by the assessee pending finalisation of certain issues. The party was insisting upon the payment of such amount as evident from the copy of letter dt. 29th Jan., 1993 and 13th May, 1993, produced before the lower authorities and thus, the amount was neither waived off by the party nor written back unilaterally by the assessee. So far as the amount of Rs. 2,79,552 due to Jay Coach, the learned authorised representative submits that certain bus bodies were supplied by the party in the year 1987, and the amount was outstanding in respect of this invoice only. Since this amount was payable and has not been waived off by the party, the provisions of Section 41(1) of the Act are not applicable. He submits further that to apply the provisions of Section 41(1) of the Act, the liability must have finally ceased and there must be no chance of revival of the liability in future as held by the Hon'ble Allahabad High Court in the case of J.K. Synthetics Ltd. v. ITO and Anr. (1976) 105 ITR 864 (All) and affirmed by the Hon'ble Supreme Court in Union of India v. J.K. Synthetics Ltd. (supra). He also refers the following decisions :

1. Chief CIT v. Kesaria Tea Co. Ltd. (2002) 254 ITR 434 (SC)

2. V.M. Shaik Mohammed Rowther v. Settlement Commissioner (IT & WT) (1999) 236 ITR 581 (Mad)

3. CIT v. Abdul Ahad (2001) 247 ITR 710 (J&K)

He also refers Explanation to Section 41(1) of the Act.

7.5 After considering the arguments advanced by the parties in view of the material available on record and having gone through the order impugned and the decisions relied on by the parties, we find force in the submissions of the learned authorised representative that remission, if any, made in later years would relate to that year, but in the present year liability was alive. The Hon'ble Supreme Court in the case of CIT v. Kesaria Tea Co. Ltd. (supra) on similar issue was pleased to hold that the amount written back cannot be taxed as deemed profit as unilateral action of the assessee was not conclusive, We, thus find no reason to interfere with the first appellate order on the issue as the same is comprehensive and reasoned one, Ground No. (ii) is thus rejected.

8.1 Ground No. (iii) relates to deleting of addition made by the AO under Section 37(4) and (5) of the Act of Rs. 1,50,086 being expenses on rent, repairs and depreciation on guest house.

8.2 The learner senior Departmental Representative submits that the issue raised in the ground is covered in favour of the Revenue by the decision of the Hon'ble Madhya Pradesh High Court in the case of National Newsprint & Paper Mills Ltd. v. CIT (1998) 234 ITR 729 (MP).

8.3 The learned authorised representative, on the other hand, submits that no reason was recorded for making the addition under Section 143(3) of the Act and the learned CIT(A) has accepted the assessee's contentions. He refers page Nos. 134 and 135 of the chart filed on behalf of the assessee wherein several decisions have been cited stated to be in support of the contention of the assessee. He submits further that the decision of the Hon'ble Madhya Pradesh High Court relied on by the learned senior Departmental Representative does not deal with the issue of rent paid on guest-house, rather it is on the issue of maintenance only. He cites the judgment of the Hon'ble jurisdictional High Court in the case of Malwa Vanaspati & Chemical Co. Ltd. v. CIT (1985) 154 ITR 655 (MP). He submits further that Section 37(4) of the Act be r/w Sections 40 and 40A of the Act. The assessee had claimed expenditure by way of rent, repairs and depreciation on guest house allowable under Sections 30, 31 and 32, respectively, were not disallowable under Section 37(4) of the Act, submits the learned authorised representative.

8.4 We have considered the arguments advanced by the parties in view of the material available on record and have also gone through the decisions relied upon by the parties as well as the order impugned herein. The CIT(A) had allowed the claim accepting the contention of the assessee in this regard following the decision of the Hon'ble Bombay High Court in the case of CIT v. Chase Bright Steel Ltd. (1989) 177 ITR 124 (Bom), decision of the Delhi Bench of the Tribunal in Etcher Good Earth Ltd., Bombay Bench of the Tribunal in American Bureau of Shipping v. ITO (1986) 19 ITD 793 (Bom) and of the Hon'ble Bombay High Court in the case of Century Spinning & Mfg. Co. Ltd. v. CIT (1991) 189 ITR 660 (Bom). The decision of the jurisdictional High Court relied on by the learned senior Departmental Representative is, however, latest amongst the above. We, therefore, respectfully following the same decide the issue in favour of the Department, restoring the addition made by the AO in this regard. This ground of the Department is thus allowed.

8.5 Ground No. (iv) is general in nature which needs no separate adjudication.

8.6 In the result, the appeal is partly allowed in favour of the Department.

9.1 ITA No. 48/Ind/98 (Asst. yr. 1991-92). The first appellate order has been impugned by the assessee on the following grounds that the learned CIT(A) has erred on facts and law in confirming the disallowance :

(i) of royalty payment of Rs. 98,08,000

(ii) to the extent of Rs. 2,95,000 out of the interest paid.

9.2 Besides the above, an additional ground (that on the facts and in the circumstances of the case, the appellant should be held entitled to deduction of Rs. 1,42,00,000 on account of actual payment of funded interest) has been raised on the basis that this ground has arisen in pursuance with the order of the Tribunal that the deduction under Section 43B of the Act in respect of the funded interest was not admissible for the asst. yr. 1989-90.

9.3 Similar arguments have been advanced by the parties as in the aforesaid appeal for the asst. yr. 1989-90. Following the view taken therein, we decide this additional ground in favour of the assessee with the direction to the AO to allow the claim of the assessee.

9.4 Ground Nos. (i) and (ii)--Similar issues have been raised in these grounds in the appeal for the asst. yr.1989-90. Following the view taken therein on the issue, we decide these grounds in favour of the assessee.

9.5 In the result, the appeal is allowed in favour of the assessee.

10.1 ITA No- 51/Ind/98 (Asst yr. 1991-92) : The Department has impugned the first appellate order on the ground that on the facts and circumstances of the case, the learned CIT(A) has erred in :

(i) deleting the disallowance of service charges paid to Eicher Good Earth Ltd. as the assessee could not justify payment made to above company being its subsidiary company; payment was hit by the provisions of Section 40A(2)(b) of the Act.

(ii) directing the AO to allow depreciation in respect of increase in the cost of plant and machinery due to fluctuation in exchange rate without appreciating the circular of CBDT issued in October, 1984 stating that depreciation will be allowed on enhanced cost only when the payment is made by the company to the foreign company.

10.2 Besides the above, an additional ground that the learned CIT(A) has erred in deleting the addition of Rs. 1,74,340 made by the AO in respect of guest house expenses has been raised.

10.3 After hearing both the parties, we are of the view that there is no need to consider fresh material for disposal of the additional ground. We, therefore, allow this additional ground for our consideration and adjudication at this stage. The learned senior Departmental Representative adopts the same arguments advanced by him on identical issue raised in the asst. yr. 1990-91 whereas the learned authorised representative also adopting the same arguments advanced by him submits further that the additional ground raised herein is not properly worded.

10.4 We have already considered and adjudicated this issue in the Departmental appeal for the asst. yr. 1990-91. Following the view taken therein, we allow this additional ground in favour of the Department.

10.5 Ground No. (i) : The issue raised in ground No. (i) has been considered by us in the Departmental appeal for the asst. yr. 1990-91. Following the view taken therein, we decide the issue in favour of the assessee, rejecting ground No. (i) herein.

Ground No. (ii) : The facts in brief are that the assessee had incurred a liability in foreign exchange for acquisition of plant and machinery. The assessee claimed enhancement in the actual cost of assets for the purposes of grant of depreciation in terms of Section 43A of the Act. The AO disallowed depreciation to the enhanced cost of assets on the basis that under Section 43A of the act, the increase in liability is to be recognized only in the year of payment and not as accounted for by the assessee. The learned CIT(A) has, however, allowed the claim of the assessee following the different decisions of Hon'ble High Courts wherein it was held that for enhancement in the actual cost of assets under Section 43A of the Act, actual payment of the increased liability was not a condition precedent. Against this, the Department is in appeal.

10.6 The learned senior Departmental Representative submits that the intent of legislature in Section 43A was to allow the claim on actual payment basis. He refers the contents of page Nos. 2603 to 2605 of the book "Income-tax Law" authored by Chaturvedi and Pithisaria. He submits further that the claim of additional depreciation was due to fluctuation in the rate of foreign exchange. He refers the following decisions :

(i) Jogendra Nath Naskar v. CIT (1969) 74 ITR 33 (SC)

(ii) CIT v. Frick India Ltd. (2002) 253 ITR 428 (Del), and

(iii) Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC)

10.7 The learned authorised representative submits that as per the method of accounting consistently followed by the assessee, the outstanding liability in foreign exchange was convertible at the exchange rate prevailing at the end of each year in accordance with the Accounting Standard-11 on 'Accounting for Foreign Exchange Fluctuations' issued by the Institute of the Chartered Accountants of India. He submits that the requirement of the provisions laid down under Section 43A is that there must be increase in liability of payment. He banks upon the decisions relied on by the learned CIT(A) on the issue and submits that the Hon'ble Gujarat High Court in the case of New India Ind. Ltd. v. CIT (1993) 203 ITR 933 (Guj) has been pleased to deal with this issue while deciding it in favour of the assessee. He invites our attention to the contents of p. 7 of the order of the Tribunal for the asst. yr. 1989-90 in the case of the assessee and submits that there is no contingent liability. He submits further that the assessee has been following consistent method of accounting and unless there is loss to the Revenue, the same should not be disturbed. He refers the following decisions :

(i) Bharat Earth Movers v. CIT (supra); and

(ii) CIT v. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom)

10.8 The learned authorised representative also banks upon the first appellate order.

10.9 The learned senior Departmental Representative rejoins with the submission that the provisions of Section 43A may come in operation only if liability still remains. He puts further stress on the decision of the Hon'ble Supreme Court in the case of CJT v. Arvind Mills Ltd. (supra)

10.10 We have considered the arguments advanced by the parties in view of the material available on record and have gone through the order impugned as well as the judgments relied on by them. So far as the decision of the Tribunal in the asst. yr. 1989-90, in the case of the assessee is concerned, the appeal was preferred against the order of the learned CIT under Section 263 and the appeal was allowed by the Tribunal on the basis that the assessment order on the point (of allowing the assessee's claim of depreciation and investment allowance on the enhanced value of assets due to fluctuation of exchange rates without actual payment) had merged with the appellate order of the learned CIT(A) and the CIT had no jurisdiction to exercise his revisionary powers under Section 263 of the Act with regard to this. The Hon'ble Bombay High Court in the case of Padamji Pulp & Paper-Mills Ltd. v. CIT (1994) 210 ITR 97 (Bom) relied on by the learned authorised representative has been pleased to decide the issue in favour of the assessee with the observation that increased liability on account of change in rate of exchange on outstanding loan on the last day of the accounting year to be added to actual cost for calculating depreciation. The Hon'ble High Court while deciding the issue has also referred the decision of the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) and those in the case of CIT v. Arvind Mills Ltd (supra) relied on by the learned senior Departmental Representative. The Hon'ble Madras High Court in the case of CIT v. Chengal Varayan Co-operative Sugar Mills Ltd. (2000) 242 ITR 440 (Mad) relied on by the learned authorised representative has also been pleased to hold that the increase in the liability of the assessee during the previous year on account of the change in the rate of exchange was part of the actual cost of the machinery acquired from a foreign country and the assessee was entitled to investment allowance on the additional cost. We thus, find no reason to interfere with the first appellate order on the issue which is comprehensive and reasoned one. Ground No. (ii) is thus rejected.

10.11 In the result, the appeal is partly allowed.

11. ITA No. 52/Ind/98 (Asst yr. 1991-92) : The Department has impugned the first appellate order on the grounds that the learned CIT(A) has erred in deleting the disallowance of the club fee of Rs. 72,010 made by the AO relying on the decision of Otis Elevator Company (I) v. CIT (1992) 195 ITR 682 (Bom) and without appreciating that provisions of Section 40(a)(v) of the Act have since been omitted by the Finance Act, 1971.

11.2 The learned senior Departmental Representative banks upon the assessment order in this regard whereas the learned authorised representative cites the following decisions opposing the aforesaid ground :

(i) Kamal Textiles v. ITO (1991) 189 ITR 339 (MP)

(ii) Otis Elevator Co. (India) Ltd. v. CIT (supra)

and refers CBDT Circular No. 689 dt. 24th Aug., 1994

11.3 We have gone through the order impugned in view of the arguments advanced by the parties. The assessee had opposed the addition made in Section 143(1)(a) proceedings. The learned CIT(A) has dealt with the issue in detail in para Nos. 5 and 6 of its order which is comprehensive and reasoned one and need no interference.

11.4 In the result, the appeal is rejected.

12.1 ITA No. 772/Ind/95 (Asst. yr. 1992-93) : The assessee has questioned the first appellate order on the following grounds that the learned CIT(A) has erred in :

(i) confirming the disallowance of Rs. 1,72,27,000 out of royalty paid to M/s Mitsubishi Motors Corporation, Japan.

(ii) confirming the disallowance of Rs. 15,20,852 on account of exchange loss incurred in relation to the raw materials and components in transit.

(iii) confirming the disallowance of Rs. 7,21,000 on account of exchange loss incurred in relation to the payment of royalty to M/s Mitsubishi Motors Corporation of Japan.

(iv) confirming the disallowance of Rs. 93,700 out of interest paid on account of diversion of interest-bearing funds to associate companies at lesser rate of interest,

Besides the above, an additional ground that on the facts and in the circumstances of the case, the assessee should be entitled to deduction of Rs. 34,75,000 on account of actual payment of funded interest has also been raised.

12.2 After hearing the parties, we are of the view that for consideration of this ground there is no need of fresh material. Hence, the same is allowed for adjudication. Both the parties adopt the same arguments on this issue as advanced in the appeal hereinabove for the asst. yr. 1990-91. We following the view taken therein decide this additional ground in favour of the assessee in terms of the finding therein for the asst. yr. 1990-91,

12.3 Ground No. (ii) The facts in brief are that the assessee had claimed allowance of Rs. 15,20,852 on account of exchange loss incurred in relation to the raw materials and components in transit on the basis that a provision in its books of accounts for the year ended 31st March, 1991 in this regard was made at the rate of exchange prevailing on that date. The contention of the assessee was that actual liability in respect of such goods crystallised only when the same were received in India and remittance was made in respect thereof during the previous year relevant to the asst. yr. 1992-93. The AO disallowed this claim on the basis that the loss was only a notional liability and would be allowed in the year of actual payment. The learned CIT(A) confirmed the disallowance on the basis that the loss on account of exchange fluctuation in relation to import of raw material and components was not covered under Section 43A of the Act.

12.4 The learned authorised representative submits that the AO has failed to appreciate that the amount incurred was actual loss occasioned at the time of remittance of the increased liability during the relevant previous year. He submits further that the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT (supra) was pleased to hold that loss on account of exchange fluctuation in respect of transactions of trading account would be a trading loss/loss incidental to business. He submits further that the additional liability on account of exchange fluctuation relating to circulating capital has been allowed as deduction in the following cases ;

(i) CIT v. V.S. Dempo & Co. (P) Ltd. (1994) 206 ITR 291 (Bom)

(ii) CIT v. Bank of India (1996) 218 ITR 371 (Bom)

(iii) CIT v. Bharat Heavy Electricals Ltd. (1999) 239 ITR 756 (Del) and

(iv) Telemecanique & Controls (India) Ltd. v. Dy. CIT (1998) 60 TTJ (Del) 434 : (1991) 60 ITD 483 (Del)

The learned authorised representative while concluding his arguments also draws our attention to the contents of p. 76 of the paper book of the assessee i.e., details of difference in foreign exchange rate on account of raw material and components during the asst. yr. 1992-93.

12.5 The learned senior Departmental Representative, on the other hand, banks upon the orders of the authorities below.

12.6 We have considered the arguments advanced by the parties and have gone through the order impugned as well as the decisions relied on by the learned authorised representative and the Department. The Hon'ble Delhi High Court in the case of CIT v. Bharat Heavy Electricals Ltd. (supra) on the issue was of the view that the Tribunal came to the correct conclusion that the additional liability incurred by the assessee on the change of the rupee-rouble parity ratio was allowable as a trading liability applying the decision of the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT (supra). The Delhi Bench of the Tribunal in the case of Telemecanique & Controls (supra) was of the view that the assessee was entitled to deduction in the asst. yr. 1992-93 on revenue account in respect of loss arising consequent to increased foreign currency liability for payment of cost of raw materials imported as a result of adverse fluctuation in exchange rate as on 31st March, 1992, though the amount was not actually paid in relevant previous year. We thus following the ratio laid down in the decisions relied on by the learned authorised representative decide the ground in favour of the assessee with the direction to the AO to allow the claim of the assessee.

13.1 Ground No. (iii) The facts in brief are that the assessee claimed allowance of Rs. 7,21,000 on account of exchange loss incurred in relation to the payment of royalty to Mitsubishi Motor Corporation of Japan (MMC). The submissions of the assessee were that the royalty payment by the assessee to MMC for the last quarter of financial year 1990-91 being Japanese Yen 2,12,465 was provided in books at Rs. 35,66,236 on the basis of exchange rate prevailing on 31st March, 1991. The aforesaid royalty and royalty for the period from April, 1991 to June, 1991 was remitted in November, 1991 after deduction of tax at source. At the time of remittance, due to variation in exchange rates, the liability of royalty pertaining to January, 1991 to March, 1991 came to Rs. 42,87,717.68. The difference of Rs. 7,21,000 was thus claimed as loss incidental to business. The AO rejected the claim of loss alleging that the assessee had failed to establish that the additional liability crystallised during the relevant previous year and that the same was not in the knowledge of the assessee in the earlier previous year. The learned CIT(A) upheld the disallowance relying on the decision of the Hon'ble Supreme Court in the case of Shri Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC) and the decision of the Hon'ble Bombay High Court in the case of Carona Sahu Co. Ltd. v. CIT (1995) 213 ITR 106 (Bom).

13.2 The learned authorised representative submits that the liability arising on account of exchange rate fluctuation arose only at the time of actual remittance of royalty during the relevant previous year and the same could not have been anticipated or provided at an earlier point of time. He submits further that although the liability pertains to the liability payable for the earlier year, the same crystallised/became known only at the time of remittance of the same during the relevant previous year and such additional liability is clearly allowable in the year the liability became known for the first time as held by the Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Ind. Ltd. v. CIT (1995) 213 ITR 523 (Guj) and by the Hon'ble Calcutta High Court in the case of S.P. Jaiswal Estates (P) Ltd. v. CIT (1995) 216 ITR 145 (Cal). He submits further that the decisions relied on by the learned CIT(A) have no application to the facts of the present case as therein in the case of Shri Sajjan Mills Ltd. (supra) it was held by the Hon'ble Supreme Court that the amount of liability for gratuity not provided in the books of accounts was not allowable deduction, whereas in the case of the assessee it has not been appreciated by the lower authorities that the additional liability arising at the time of remittance of royalty has been duly debited in its books of accounts. The learned authorised representative invites our attention to the contents of pp. 78 to 83 of the paper book filed by the assessee i.e. details of exchange loss on account of royalty for the asst. yr. 1992-93 and correspondence relating thereto.

13.3 The learned senior Departmental Representative, on the other hand, draws our attention to the contents of para 4 p. 5 of the assessment order and submits that though the assessee had given calculation of claimed loss but it had failed to give documentary evidence before the AO that these liabilities were crystallised during the accounting period relevant to the assessment year under consideration and as such the assessee has failed to discharge its onus. He submits further that even the CIT(A) has not examined this issue in detail nor was he clear as to whether the amount was paid during the year. He invites our attention to the contents of para 8 p. 3 of the first appellate order.

13.4 Considering the arguments advanced by the parties in view of the material available on record as well as having gone through the orders of the lower authorities and the decisions relied on by the parties, we are of the view that the transaction was of revenue in nature but to meet the ends of justice we remand the matter back to the file of the AO to allow the claim of the assessee only on furnishing the evidence by the assessee that the additional liability crystallised during the relevant previous year and that the same was not in the knowledge of the assessee in the earlier previous year. The ground is thus partly allowed for statistical purposes.

14. Ground No. (iv) : The issue raised in this ground has already been decided by us after hearing both the parties in the appeal for the asst. yr. 1990-91 hereinabove. Following the view taken therein, we decide this ground in favour of the assessee. The ground is thus allowed.

15. Ground No. (v). It is general in nature which needs no independent adjudication.

16. In the result, the appeal is partly allowed.

17.1 ITA No. 831/Ind/95 (Asst. yr. 1992-93): The Department has questioned the first appellate order on the following grounds that on the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting :

(i) the addition of Rs. 1,12,50,000 made by the AO under Section 40A(2)(b) on account of disallowance being 3/4th of service charges paid to EGL as assessee company failed to produce supporting evidence and bills etc. as well.

(ii) the disallowance of Rs. 11,63,000 out of depreciation in respect of increased cost of P&M by Rs. 46,56,000 due to fluctuation in exchange rate of foreign currency even though the assessee did not remit the amount of the increased cost.

(iii) the disallowance of Rs. 18,82,000 under the head stores and tools consumed holding that the same was not in the nature of capital expenditure even though the assessee itself had claimed such expenses as capital expenditure in earlier years.

17.2 Grounds Nos. (i) and (ii) : The issues raised in these grounds have already been adjudicated by us in favour of the assessee after considering the arguments advanced by the parties in the appeal for the asst. yr. 1990-91. Following the reasons given therein, we decide these grounds in favour of the assessee Ground No. (iii) The facts in brief are that during the year under appeal the assessee had written off stores and tools consumed amounted to Rs. 18,82,000. The AO alleged that the assessee had itself treated tools as capital expenditure in earlier years and disallowed the expenditure incurred under the head 'Stores and tools consumed'. The submission of the assessee remains that it had continuously pursued a policy of indigenisation of components due to which level of indigenisation has arisen from 5.4 per cent at the beginning to 65.55 per cent in the year under consideration and this indigenisation has resulted in increased consumption of stores and tools. The learned CIT(A) has, however, deleted the said disallowance holding that the same was not in the nature of capital expenditure even though the assessee itself had claimed such expenses as capital expenditure in earlier years. Against this appellate order, the Department is in appeal before us.

17.3 The learned senior Departmental Representative draws our attention to the contents of para 5 of the assessment order, wherein the AO has observed as tools are of more than one year and the assessee itself has treated tools as capital assets in the past and the tools in question are part and parcel of the plant and machinery, therefore, the claim of the assessee is being rejected and entire amount is capitalised to the cost of assets, giving depreciation (c) 25 per cent on Rs. 18.82 lacs while computing the income. He also draws our attention to the contents of page Nos. 19, 32 and 137 of the paper book i.e., terms of the contract between the assessee and MMC.

17.4 The learned authorised representative on the contrary supports the first appellate order and submits that level of indigenisation of items of stores, and tools has risen from 5.4 per cent at the beginning to 65.55 per cent in the year under appeal. He submits further that these items were of temporary life-span since the indigenisation required frequent and rapid changes in the stores and tools and these items therefore, did not yield any advantage of enduring nature which could be stated to be in the capital nature. He makes it clear that the assesses had never in the past treated expenditure on tools and stores as capital and such expenditure had in the past been allowed as revenue deduction. He cites the decision of the Hon'ble Punjab and Haryana High Court in the case of Saraswati Industrial Syndicate Ltd, v. CIT (1982) 137 ITR 886 (P&H) wherein, he submits, the Hon'ble Court applying the ratio of the decision in the case of Empire Jute Company Ltd. v. CIT (supra) held that the tools and implements, laboratory equipments, etc. were purchased to carry on the assessee's business more efficiently and profitably and, hence, the expenditure thereon was a revenue expenditure. He draws our attention to the contents of page Nos. 99 to 103 of the paper book filed by the assessee i.e., submissions of the assessee before the CIT(A).

17.5 We have considered the arguments advanced by the parties in view of the materials available on record and have also gone through the order impugned as well as the decisions cited by the learned authorised representative. The learned CIT(A) has dealt with the issue in paras Nos. 9 to 11 of its order in detail. In para 11 he has come to the conclusion that since the claims were allowed in the asst, yrs. 1990-91 and 1991-92 without making any disallowance under this head, there, is no justification to take a divergent view on identical facts particularly under the circumstances that the cases Saraswati Industrial Syndicate Ltd. v. CIT (supra) and Empire Jute Ltd. v. CIT (supra) relied on by the learned representative (1992) 137 ITR 886 (P&H) (supra) and 124 ITR 1 (SC) (supra) are squarely applicable to the facts of the case. He has, accordingly, deleted the disallowance. We do not find infirmity in the first appellate order which is reasoned one. This ground is thus rejected.

18. Ground No. (iv) It is general in nature which needs no independent adjudication.

In the result, the appeal is dismissed.