ESCORTS EMPLOYEES ANCILLARIES LTD. V. CIT HY.ROHTAK

ITR/49/1998

AI Insights

The case revolves around the interpretation of section 35AB(1) of the Income Tax Act, 1961, concerning the deductibility of payments made for know-how. The applicant, Escorts Employees Ancillaries Ltd., argued that they were entitled to deductions for payments made in the previous years 1982-83 and 1983-84, despite these payments being made before the enactment of section 35AB(1) on 1.4.1986. The Tribunal and the High Court both found that the section applies prospectively, rejecting the applicant's claim. The court's decision was influenced by the legislative intent and the specific wording of the section, which does not support retrospective application.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 746318 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 10-01-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Versus Shri Vallabh Glass Works Limited, Commissioner of Income Tax Vs. Tamil Nadu Chemical Products Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: TEJINDER JOSHI
• Assessee Lawyers: AKSHAY BHAN; AALOK MITTAL
• Keywords: Deduction; Know-how; Prospective application; Retrospective operation
• Section: 35AB(1)

Judgement Text

"I.T.R. No.49 of 1998 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH I.T.R. No.49 of 1998. Decided on:-January 10, 2014. Escorts Employees Ancillaries Ltd. Faridabad. .........Applicant. Versus The Commissioner of Income-Tax Haryana, Rohtak. ...........Respondent. CORAM: Hon'ble Mr. Justice Rajive Bhalla Hon'ble Mr. Justice Dr. Bharat Bhushan Parsoon. ***** Present:- Mr. Akshay Bhan, Advocate and Mr. Aalok Mittal, Advocate for the applicant-assessee. Mr. Tejinder Joshi, Advocate for the respondent-revenue. Rajive Bhalla, J. The Income Tax Appellate Tribunal Delhi Bench “D” (hereinafter referred to as, the Tribunal) had forwarded the following question of law for an answer: “Whether the ITAT was correct in law in the facts the circumstances of the case in holding that deduction under section 35AB could not be allowed in respect of payments made prior to 1.4.1986 and thereby denying deduction of Rs.1,26,944/- being 1/6th of Rs.7,61,666/-?” Yag Dutt 2014.01.22 18:12 I attest to the accuracy and integrity of this document I.T.R. No.49 of 1998 -2- Counsel for the assessee submits that the assessee made payment for know-how in the previous years 1982-83, 1983-84 relevant to assessment years 1983-84 and 1984-85. In view of amendment of Section 35AB(1) of the Income Tax Act, 1961(for short, the Act), the applicant is entitled to deduction of 1/6th of the amount so paid, while computing profits and gains of business, from previous year i.e. 1982-83 and 1983-84 and thereafter, deductions in equal installments for each of the five immediately succeeding previous years, namely, 1984-85, 1985-86, 1986-87, 1987-88 and 1988-89 or previous year 1990-91. It is further submitted that the applicant does not claim deduction, as provided by Section 35AB(1) of the Act with respect to previous years before 1.4.1986, the date of coming into force of Section 35AB(1) of the Act but the use of words “any previous year”, “that previous year” and “for each of the five immediately succeeding previous years” clearly indicates that Section 35AB(1) of the Act applies to previous years even where payment was made before 1.4.1986. Counsel for the assessee places reliance upon a judgment of the Hon'ble Gujarat High Court in 207 ITR 963 titled Commissioner of Income Tax Versus Shri Vallabh Glass Works Limited in support of his argument that even though Section 35AB(1) of the Act may not be retrospective but applies to payments made in the previous years prior to assessment year 1986-87 provided the six years provided for distribution of deductions fall after 1.4.1986. Counsel for the revenue submits that if the argument advanced Yag Dutt 2014.01.22 18:12 I attest to the accuracy and integrity of this document I.T.R. No.49 of 1998 -3- by counsel for the assessee is accepted, it would amount to retrospective operation of Section 35AB(1) which applies prospectively from the date of enactment i.e. 1,4,1986. The Tribunal has, therefore, rightly rejected this contention. We have heard counsel for the parties, considered provisions of Section 35AB(1) of the Act, as introduced from 1.4.1986 and express our inability to answer the question of law referred in favour of the assessee. Admittedly, Section 35AB(1) came into effect from 1.6.1986 and does not provide for retrospective operation of the amended provision. Accepting the assessee's plea that it would apply to a previous year prior to introduction of Section 35AB(1) would assign retrospectivity to Section 35AB(1) though retrospectivity has not been assigned by the amending Act. The use of words “any previous year” would necessarily apply to a previous year after enactment of Section 35AB(1) of the Act and not prior thereto. A relevant extract from the order passed by the Tribunal is reproduced as below: “22. A perusal of Section reproduced above clearly indicates that basic condition for the purposes of deduction under the said section is the payment in the previous year of any lump sum consideration for acquiring any know-how for use for the purposes of business. The deduction is permissible for that previous year in which the payment is made. Once deduction has been allowed further deduction @ 1/6th is Yag Dutt 2014.01.22 18:12 I attest to the accuracy and integrity of this document I.T.R. No.49 of 1998 -4- allowable in the subsequent assessment years. There is no dispute on facts that the claim of the assessee is relating to the payments made in earlier previous years on account of know- how. In our view, no deduction u/s 35AB is permissible in respect of payments made prior to 1.4.86. The decision of the Gujarat High Court in the case of CIT v. Shri Vallabh Glass Works Ltd. (1194) 207 ITR 963 (Gujarat) relied upon by the learned counsel for the assessee is inapplicable to the facts of this case. In that case depreciation was allowed in respect of certain assets at the rates provided under the schedule. The depreciation rate was revised to provide a deduction @ 100% depreciation was provided on the ground that some deduction had been allowed earlier to the assessee and that deduction would be permissible to the assessee at 100% only in the first year. Their lordships of the Gujarat High Court rejected the claim of the revenue and held that depreciation was permissible to the assessee @ 100% of the written down value. In the present case, the deduction is not on account of depreciation but on expenditure of know-how. The claims of depreciation u/s 32 is allowed at rates specified under the schedule on the actual cost of the assets. In subsequent assessment years deduction is permissible on the written down value calculated on the basis of actual cost of the assets less the allowance of depreciation. Yag Dutt 2014.01.22 18:12 I attest to the accuracy and integrity of this document I.T.R. No.49 of 1998 -5- Deduction on account of depreciation was allowable to the assessee in the case before the Gujarat High Court. The question was as to whether deduction at 100% could be allowed in respect of assets on which depreciation had already been allowed. In the case before us applicability of Section 35AB is involved which came into effect from 1.4.86 only. Deduction u/s 35AB, therefore, could not be allowed in respect of the payments made prior to 1.4.86. Since assessee has been allowed deduction on account of expenditure on know-how incurred from 1.4.86 we see no reason to interfere with the finding of the CIT(A). The claim of the assessee is accordingly dismissed.” The assessee relies upon a judgment of Hon'ble Madras High Court in T.C. No.103 of 1997 reported as (2003) 259 ITR 582 titled Commissioner of Income Tax Vs. Tamil Nadu Chemical Products Limited. A perusal of the said precedent reveals that the question relating to retrospective operation of Section 35AB(1) was neither a question in dispute nor was such a question answered. It appears from the facts of the case that the expenditure on know-how was incurred after coming into force of Section 35AB(1) of the Act as the assessment year in dispute is 1991-92 i.e. previous year 1990-91. The aforesaid judgment is, therefore, entirely irrelevant for the present controversy. In our considered opinion, an interpretation as suggested by counsel for the assessee would be contrary to Yag Dutt 2014.01.22 18:12 I attest to the accuracy and integrity of this document I.T.R. No.49 of 1998 -6- legislative intent as there was no impediment on legislature making the said provision retrospective in operation. The Tribunal has, therefore, rightly interpreted Section 35AB(1) of the Act to apply to know- how in a previous year, after 1.6.1986. In view of what has been recorded hereinabove, we dispose of the reference by answering the question of law in favour of the revenue and against the assessee. (Rajive Bhalla) Judge (Dr. Bharat Bhushan Parsoon) Judge January 10, 2014 'Yag Dutt' Yag Dutt 2014.01.22 18:12 I attest to the accuracy and integrity of this document "