COMMISSIONER OF INCOME TAX HYD V. M/S. LHYDERABAD INDUSTRIES LTD. HYD

RC/105/1997

AI Insights

The case revolves around the Income Tax Appellate Tribunal's referral of two legal questions concerning the assessee, Hyderabad Industries Limited, related to expenditures and deductions claimed under the Income Tax Act, 1961. The first question addressed whether the expenditure of Rs.22,52,068 incurred on investigating the feasibility of a cement plant could be considered as 'know-how' for the purposes of Section 35AB. The second question pertained to the eligibility of deductions under Section 32AB for income from dividends. The Tribunal's decisions were challenged by the Revenue, leading to this reference.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 719069 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 12-11-2013
• Assessment Year: misc
• Other Referred Cases: Apollo Tyres Limited Vs. Commissioner of Income Tax, Kochi
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Feasibility Study; Income tax appellate tribunal; Know-how; Expenditure write off; Cement plant; Diversification
• Section: 35AB; 32AB

Judgement Text

"HON’BLE SRI JUSTICE G. CHANDRAIAH AND HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C. No.105 OF 1997 ORDER:- (Per Hon’ble Sri Justice G.Chandraiah) At the instance of the Revenue, the Income Tax Appellate Tribunal, Hyderabad Bench-‘A’ had referred the following two questions of law: 1. “Whether, on the facts and in the circumstances of the case and in law, the ITAT is correct in law in holding that the amount of Rs.22,52,068/- incurred by the assessee in earlier years on investigation into the feasibility, viability and profitability etc., of a cement plant at Sathna so as to diversify its activities and written off during the accounting year relevant for the assessment year 1988-89 due to abandonment of such project is an expenditure incurred for acquiring ‘know-how’ for the purposes of assessee’s existing business in manufacture of asbestos product u/s.35 AB? 2. Whether, on the facts and in the circumstances of the case, the ITAT is correct in law in holding that deduction u/s.32AB is to be allowed on income from dividends from Unit Trust of India as well as Inter-corporate dividends which income is assessable under the head ‘other sources’? 2. The assessee company M/s.Hyderabad Industries Limited, formerly known as Hyderabad Asbestos Cement Products Limited, carries on business in manufacture and sale of Asbestos Cement Products. The company also exports its products and render technical services and know-how for erection and management of asbestos cement product plants. The assessee during the year of account relevant for the assessment year 1988-89 claimed an expenditure of Rs.43,42,185/- relating to the work carried out in respect of an intended cement project as ‘Sathna’. The company embarked on investigation into the feasibility, viability, and profitability etc., of cement plant at ‘Sathna’ so as to diversify the Company’s activities. This expenditure was incurred in the earlier years and has been written off in the accounting year relevant for the assessment year 1988- 89 and the assessing officer disallowed the said amount observing that the expenditure incurred in the earlier years has been written off in the relevant previous year on the recommendation of the experts that the cement project cannot be implemented. The year of recommendation and the write off of expenditure does not pertain to this year. On filing appeal also, the Commissioner of Income Tax-(Appeals) (CIT-(A)), after noting the break up of expenditure incurred by the assessee for consultancy, feasibility report fee, mining lease, etc., over the years, and after nothing the provisions of Section 35AB of the Income Tax Act, 1961 (for short “the Act”) and the definition of the term ‘know-how’, observed that the expenditure incurred in lumpsum to acquire the know-how in connection with the searching for discovery and testing of the deposits (mineral deposits) totalling to Rs.22,52,966/- is allowable, as they fall within the provisions of Section 35AB of the Act and the assesee would be entitled to write off proportionately of this expenditure. On further appeal by the Revenue, the Tribunal uphold the view taken by the CIT(A) on this aspect. 3) Sri S.R.Ashok, Learned senior counsel appearing for the Revenue submits that the work related to an intended cement project at ‘Sathna’ to diversify the company’s activities of the assessee; that the expenditure incurred was preliminary in nature and relates to earlier years, but the same was sought to be written off in the year under consideration. He contends that under the provisions of Section 35AB of the Act, a condition to be satisfied is that the sum should have been paid as lumpsum consideration for acquiring any know-how for use, for the purposes of assessee’s business. This condition was not satisfied in this case, as the expenditure incurred in connection with the setting up of a new cement plant cannot be termed as expenditure on ‘know-how’ for use for the purposes of assessee’s business. The other condition to be satisfied is that the assessee should have paid the lumpsum consideration in the relevant previous year, in which the 1st instalment of deduction at 1/6th thereof is to be allowed. He further contended that the assessee had not placed any material evidence to indicate that the expenditure to an extent of Rs.22,52,066/-was in the nature of ‘know-how’ payments within the scope of the explanation to Section 35AB of the Act. 4. Sri S.Ravi, learned counsel for the assessee contends that the expenditure to an extent of Rs.22,52,066/- was in the nature of ‘know-how’ payments and fall fully within the scope of explanation to Section 35AB of the Act and he placed reliance on the definition of the term ‘know-how’ and strongly supported the order of the CIT(A) and contended that the assesee is entitled to write off the same. 5. Having gone through the above submissions, it shows that setting up of the cement plant is a new business to the assessee, as it has no existing cement plant and the expenditure in question has no relevance to the existing business of the assessee. Further, it shows that in this case the expenditure was incurred in earlier years for the intended new project and such expenditure is being written off in the year of account. However, it falls within the scope of nature of ‘know-how’ payments as defined in explanation to Section 35AB of the Act. Further it noticed that the grounds raised by the Revenue in the present reference were not raised either before the original authority or the appellate authority. For the purpose of disallowing the benefit claimed by assessee, the only ground that was raised by the Revenue, at paragraph 18 of the order of the Tribunal, is as under:- “We have considered the rival submissions, and perused the impugned order of the CIT(A). It is the contention of the learned Departmental Representative, that setting up of a cement plant is a new business of the assessee, as it has no existing business of the assessee. On the other hand, the learned counsel for the assessee, placing reliance on the definition of the term ‘know-how’ strongly supported the order of the CIT(A).” 6. In this connection, it is relevant to mention the definition of the term ‘know-how’ mentioned in explanation to 35AB of the Act. It reads as follows:- “ Any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto.)” Having gone through the above definition, this Court feels that the expenditure incurred in lumpsum to acquire know-how in connection with the searching for discovery of testing of the deposits (mineral deposits) totalling to Rs.22,52,066/- as referred to above, fall within the scope of Section 35AB of the Act and the assessee is entitled to write off proportionately of this expenditure. This finding arrived at by the Revisional authority and the appellate authority including the appellate Tribunal deserves to be upheld. Therefore, the question No.1 is answered infavour of the assessee and against the revenue. 7. In sofaras the question No.2 is concerned, as it is rightly submitted by the learned counsel for the assessee that the issue is covered by the judgment rendered by the Supreme Court in Apollo Tyres Limited Vs.Commissioner of Income Tax, Kochi[1] which was also followed by the Tribunal in considering the above case. Therefore, the question is answered infavour of the assessee and against the Revenue. 8. Accordingly, the Referred Case is disposed of. No order as to costs. Miscellaneous Petitions, if any, pending in this Referred Case shall stand disposed of. ________________ G. CHANDRAIAH,J _______________________ CHALLA KODANDA RAM, J Date:12-11-2013. Nvl [1] 255 ITR 273(SC) "