ACIT, Faridabad V. M/s. Hindustan Syringes & Medical Devices Ltd., New Delhi

ITA 1934/DEL/2012

• Counselvise Citation: 193420114 RSA 2012
• Duration Of Justice: 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-07-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 26-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGH
• Assessee Lawyers: V K AGGARWALAR
• Keywords: Depreciation; Earning of tax free income; Royalty expenses; Capital expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI C BENC H BEFORE SHRI R.P. YADAV, JM & SHRI A.N. PAHUJA, A M ITA NOS.1934 & 1935 /DEL/2012 ASSESSMENT YEARS:2007-08 & 2008-09 ASSISTANT CIT, CENTRAL CIRCLE-II, FARIDABAD V/S . M/S HINDUSTAN SYRINGES & MEDICAL DEVICES LTD., ASHOKA ESTATE, GROUND FLOOR, LOFT NO.3, 24, BARAKHAMBA ROAD, NEW DELHI [PAN : AAACH 0007 M) (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI V.K. AGGARWAL,AR REVENUE BY SHRI SATPAL SINGH, DR DATE OF HEARING 28-06-2012 DATE OF PRONOUNCEMENT 06-07-2012 O R D E R A.N.PAHUJA:- THESE TWO APPEALS FILED ON 26.04.2012 BY THE REVENU E AGAINST TWO SEPARATE ORDERS DATED 16.02.2012 OF THE LD. CIT (A)(CENTRAL)-GURGAON, RAISE THE FOLLOWING GROUNDS:- I.T.A. NO. 1934/D/2012[AY 2007-08] 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) WAS RIGHT IN LAW IN DELETI NG THE ADDITION OF ` `11,44,183/- MADE BY THE ASSESSING OFFICER FOR EARNING DIVIDEND INCOME OF ` `1,61,44,244/- U/S 14A OF THE INCOME-TAX ACT. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) WAS RIGHT IN LAW IN DELETI NG THE ADDITION OF ` ` 12,12,951/- ON ACCOUNT OF ROYALTY IN VIEW OF HONBLE SUPREME COURTS DECISION IN THE CAS E OF JONAS WOODHEAD AND SONS (INDIA) LTD. VS. CIT IN ITA N OS. 1934 & 1935/DEL./2012 2 (224 ITR 342) AND SOUTHERN SWITCH GEAR LTD. VS. CIT IN (232 ITR 359), & SCIENTIFIC ENGINEERING HOUSE LT D., VS. CIT IN (157 ITR 86, I.T.A. NO. 1935/D/2012[AY2008-09] 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) WAS RIGHT IN LAW IN DELETI NG THE ADDITION OF ` ` 11,85,916/- MADE BY THE ASSESSING OFFICER FOR EARNING DIVIDEND INCOME OF ` ` 2,11,15,548/- U/S 14A OF THE INCOME-TAX ACT. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) WAS RIGHT IN LAW IN DELETI NG THE ADDITION OF ` `63,60,981/- ON ACCOUNT OF ROYALTY IN VIEW OF HONBLE SUPREME COURTS DECISION IN THE CASE OF JON AS WOODHEAD AND SONS (INDIA) LTD. VS. CIT IN (224 ITR 342). 2. ADVERTING FIRST TO GROUND NO.1 IN THESE TWO APP EALS, FACTS, IN BRIEF, AS PER RELEVANT ORDERS FOR THE AY 2007-08 ARE THAT RETURN DECLARING INCOME OF ` ` 44,31,46,,834/- FILED ON 26.10.2007 BY THE ASSESSEE , ENGAGED IN THE BUSINESS OF MANUFACTURING GLASS SYRINGES, SURGICAL BLADES, DISPOSABLE SYRINGES ETC., AFTER BEING PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1 961[HEREINAFTER REFERRED TO AS THE ACT], WAS TAKEN UP FOR SCRUTINY WITH THE SERV ICE OF A NOTICE U/S 143(2) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON PERUSAL OF PROFIT AND LOSS ACCOUNT, THE ASSESSING OFFICER (A.O. IN SHORT) NOTI CED THAT THE ASSESSEE EARNED DIVIDEND INCOME OF ` `1,61,44,244/-, EXEMPT IN TERMS O THE PROVISIONS O F THE ACT. TO A QUERY BY THE AO, SEEKING DETAILS OF EXPENDITUR E INCURRED IN EARNING EXEMPT INCOME, IN TERMS OF PROVISIONS OF SECTION 14A OF TH E ACT READ WITH RULE 8D OF THE I.T. RULES, 1962, THE ASSESSEE REPLIED AS UNDER:- I) THE ACTIVITY OF INVESTMENT/EARNING OF DIVIDEND INCOME DOES NOT ENTAIL INCURRING OF ANY SPECIFIC OR SUBSTANTIAL EXP ENDITURE. ITA N OS. 1934 & 1935/DEL./2012 3 II) THERE IS NO BASIS OR JUSTIFICATION FOR APPORTIO NMENT OF COMPOSITE EXPENDITURE BEING INCURRED FOR PURPOSE OF EARNING P RIMARILY TAXABLE INCOME. III) RULE 8D OF I.T. RULE HAS BEEN NOTIFIED W.E.F. 01.04.2007 AND, THEREFORE, CANNOT HAVE RETROSPECTIVE OPERATION. 2.1 AFTER CONSIDERING THE REPLY OF THE ASSESSEE, T HE AO WHILE REFERRING TO DECISIONS IN CIT VS. SHARWAN KUMAR SWARUP,210 IT R 886(SC); H.H. SIR RAMA VARMA VS. CIT, 205 ITR 433 (SC); CIT VS. PODAR CEME NT (P) LTD., 226 ITR 625 (SC); CIT VS. SHELLY PRODUCTS LTD. 261 ITR 367(SC); CIT VS. SHAHZADA NAND & SONS,60 ITR 392(SC); AND M/S DAGA CAPITAL MANAGEMEN T PVT. LTD. IN I.T.A. NO.8057/MUM/2003 AND M/S MAXOPP INVESTMENT LTD. VS. ACIT IN I.T.A. NO.1372/DEL./2005, OBSERVED THAT IN THE INSTANT CAS E, THE ASSESSEE CONTINUED AND MAINTAINED INVESTMENTS IN TERMS OF WELL INFORME D AND CO0ORDINATED MANAGEMENT DECISIONS WHICH INVOLVED INDIRECT EXPEND ITURE INCLUDING IN COLLECTION OF INCOME, FOLLOW UP AND TELEPHONE ETCA CCORDINGLY, THE AO DISALLOWED AN AMOUNT OF ` `11,44,183/- BEING THE 0.5% OF THE AVERAGE VALUE OF INVESTMENT IN TERMS OF PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE IT RULES,1962. 2.2 LIKEWISE, IN THE AY 2008-09, THE AO DISALLOWED AN AMOUNT OF ` ` 11,85,916/- IN TERMS OF AFORESAID PROVISIONS OF SE CTION 14A READ WITH RULE 8D OF I.T. RULES,1962. 3 ON APPEAL, THE LD. CIT(A) DELETED THE DISALLOWAN CE IN THE AY 2007- 08 WHILE RELYING UPON THE DECISION DATED 18.11.2011 OF OF THE HONBLE DELHI HIGH COURT IN M/S MAXOPP INVESTMENT LTD. VS. ITO IN ITA NO.687/2009 AND THE DECISION DATED 12.08.2010 OF HONBLE BOMBAY HIGH CO URT IN THE CASE OF M/S GODREJ BOYCE MFG. CO. LTD. IN I.T.A. NO.626 OF 2010 AS ALSO MINDA INVESTMENT LTD. VS. DCIT ,2010-TIOL-699-ITAT-DEL, HOLDING AS UNDER:- ITA N OS. 1934 & 1935/DEL./2012 4 14. FROM THE AFORESAID PRONOUNCEMENT OF THE HON'BL E HIGH COURTS OF DELHI AND MUMBAI, IT IS CLEAR THEREFORE THAT RUL E 8D HAS NO RETROSPECTIVE APPLICABILITY, SO THE INVOKING OF THE SAME BY THE LD AO FOR PRESENT YEAR A Y 2007-08 THEREFORE GOES AGAI NST HIM. FURTHERMORE, THE LD. AO WAS REQUIRED TO SATISFY HIM SELF AS TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN THIS C ASE ASSESSEE HAD CONTENDED THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EARNING OF THE EXEMPT INCOME. EVEN THE SPECIAL BENC H RELIED UPON BY THE LD. AO MENTIONS ABOUT 'SATISFACTION' OF THE AO BEFORE PROCEEDING WITH THE DISALLOWANCE. THIS HAS NOT BEEN DONE. ON A PERUSAL OF THE AUDITED ACCOUNTS OF THE ASSESSEE FOR THE YEAR, IT IS SEEN THAT INVESTMENT DURING THE YEAR WAS MADE IN PR UDENTIAL ICICI FMA SERIES 35 AND THE OTHER IN PRUDENTIAL ICICI LIQ UID PLAN INSTITUTIONAL PLUS- GROWTH SERIES-34 OF 10,000,000 AND 23,000,000 UNITS RESPECTIVELY. FURTHERMORE THE ASSESSEE HAD CO NTENDED THAT THE INVESTMENTS IN THESE TWO PLANS WERE FROM THE SU RPLUS FUND OF THE ASSESSEE COMPANY. A CERTIFICATE WAS ALSO FILED FROM ICICI PRUDENTIAL AMC LTD. THAT NO EXPENSES WERE CLAIMED T O ITS CLIENTS'S ACCOUNT.. IT IS ALSO NOT A CASE OF ONE INDIVISIBLE BUSINESS GIVING RISE TO TAXABLE INCOME AS WELL AS EXEMPT INCOME. NEITHE R IS THIS A CASE OF ASSESSEE COMPANY DEALING IN SEVERAL SHARES, MUTU AL FUNDS OR SECURITIES. I FIND NOTHING CONTRARY TO REBUT THE CO NTENTION OF THE ASSESSEE AS PER ITS WRITTEN SUBMISSION FURNISHED BE FORE ME. NEEDLESS TO SAY, FOR MAKING ANY DISALLOWANCE WHICH IS NOT ARBITRARY OR ARTIFICIAL, IT MUST BE BASED ON SOME REAL AND SU BSTANTIAL MATERIAL. THE COURTS INCLUDING THE JURISDICTIONAL HIGH COURT IN THE CASE OF HERO CYCLES LTD. (2010) 323 ITR 518 ( P&H) HAVE HEL D THAT NO DISALLOWANCE CAN BE MADE ON ESTIMATE BASIS, THAT, T HERE HAS TO BE A CATEGORICAL FINDING WITH REGARD TO EXPENDITURE IN CURRED ON EARNING THE EXEMPTED INCOME. IN WIMCO SEEDLINGS LTD. VS. DC IT (109 TTJ 9(DEL)TM 462, THE HON'BLE TRIBUNAL INTER-ALIA HELD THAT THE SECTION 14A CANNOT BE EXTENDED TO DISALLOW EVEN EXPENDITURE WHICH IS ASSUMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF EA RNING THE TAX FREE INCOME. 15. ON QUERY AS TO THE POSITION OF APPEAL AGAINST T HE ASSESSMENT ORDER U/S 143(3) ON SIMILAR ISSUE FOR A Y 2006-07, THE AR OF THE ASSESSEE INFORMED THAT NO SECOND APPEAL WAS FILED S INCE THERE WAS NO JUDGMENT OF ANY HIGH COURT ON THE SUBJECT AT THE TIME OF CIT(A)'S ORDER, THE JUDGMENT OF THE SPECIAL BENCH O F THE ITAT PREVAILED AT THAT POINT OF TIME. HOWEVER, THAT THE BASIS OF CONFIRMATION OF THE DISALLOWANCE U/S 14A BY CIT(A) DID NOT SURVIVE NOW WITH THE BINDING DECISION OF THE DELHI HIGH COU RT. COPY OF THE APPELLATE ORDER WAS FURNISHED. IT IS SEEN THAT THE DISALLOWANCE U/S ITA N OS. 1934 & 1935/DEL./2012 5 14A R/W RULE 8D BY THE LD. AO RELYING ON THE DECISI ONS OF THE SPECIAL BENCHES OF ITAT (SUPRA) DELHI AND MUMBAI WA S CONFIRMED BY THE LD CIT(A) STATING THAT IN VIEW OF THE LATEST DECISION OF THE SPECIAL BENCH MUMBAI IT AT (IN THE CASE OF M/S DAGA CAPITAL INVESTMENT PVT. LTD) ON THIS ISSUE, CATEGORICALLY H OLDING THAT BEING PROCEDURAL IN NATURE, RULE 8D IS APPLICABLE WITH RE TROSPECTIVE EFFECT. (PARA 3.1 OF THE APPELLATE ORDER DT.18.3.2010). - H OWEVER, AS STATED IN PARA 13 ANTE, THIS DECISION HAS BEEN REVERSED BY THE BOMBAY HIGH COURT. 16. TO SUM UP, AS DISCUSSED IN THE PRE-PAGES, THERE HAS BEEN A CHANGE IN THE LAW AS REGARDS THE APPLICABILITY OF R ULE 8D. THE DECISIONS OF THE SPECIAL BENCHES STANDS REVERSED BY THE HIGHER JUDICIAL FORUM AND THOUGH NOT JURISDICTIONAL HIGH C OURT, AN INTERPRETATION OF LAW HAS BEEN GIVEN WHICH IMPLICIT LY OVER RULES THE DECISION OF SPECIAL BENCH INCLUDING JURISDICTIONAL SPECIAL BENCH. IT IS ALSO SETTLED LAW THAT DISALLOWANCE U/S 14A IS TO BE ON BASIS OF A CATEGORICAL FINDING THAT EXPENDITURE HAS BEEN INCUR RED FOR EARNING THE EXEMPTED INCOME. CONSEQUENTLY, AFTER A CAREFUL CONSIDERATION OF THE FACTS OF THE CASE AND THE LEGAL POSITION, I HOLD THAT APPLICATION OF THE PROVISIONS OF SECTION 14A R/W RULE 8D BY THE LD. AO FOR MAKING THE DISALLOWANCE IS NOT ACCEPTABLE. FURTHERM ORE, I AM OF THE OPINION THAT THERE IS NO MATERIAL ON RECORD TO SUBSTANTIATE ANY DISALLOWANCE BY THE AO UNDER SEC. 14A. I THEREFORE HAVE TO DIFFER FROM THE ORDER OF THE LD. CIT(A) ON THE STAND TAKEN ON THE ISSUE AT HAND FOR THE A Y 2006-07. AS SUCH, THE DISALLOWANCE MADE BY THE LD. AO IS DELETED. ASSESSEE SUCCEEDS IN GROUNDS OF APPEAL NO. 3. 3.1 LIKEWISE IN ASSESSMENT YEAR 2008-09, THE LD. C IT(A) DELETED THE DISALLOWANCE IN THE FOLLOWING TERMS:- 11. FROM THE IMPUGNED ORDER IT IS APPARENT THAT T HE LD. AO HAS ALSO NOT FOUND ANY DEFICIENCY IN THE CLAIM OF HAVIN G INCURRED RS.2,13,610/- BY THE ASSESSEE TOWARDS EARNING OF TH E INCOME NOT CHARGEABLE TO TAX. THE AR HAD SUBMITTED DETAILS OF THE EXPENDITURE INCURRED U/S 14A WHICH IS STATED TO HAVE BEEN FURNI SHED BEFORE THE LD AO, WHICH IS AS BELOW: DETAILS OF EXPENSES INCURRED ON INVESTMENTS U/S 14 FOR THE YEAR ENDING 31ST MARCH 2008: S.NO. PARTICULARS AMOUNTS (IN ` ) 1 SALARY 103181.08 MR.DUSHAYANT KUMAR ` .257952.70 OF 40% . 2 TELEPHONE/FAX/E-MAIL@ - ` .500/-P.M 6000.00 . ITA N OS. 1934 & 1935/DEL./2012 6 3 PRINTING & STATIONARY @ 2400.00 .`.200/- P.M . 4 SUPERVISION CHARGES 102027.14 MR. S.K. GANDHI ` .816217.12/305 . FOR 1 HOUR DAILY . . 213608.22 IF THE ABOVE DETAILS OF EXPENDITURE WERE FURNISHED BEFORE THE LD AO, THE SAME WERE NOT REFUTED AS EVIDENT FROM THE I MPUGNED ORDER. TO REITERATE, THE LD. AO WAS REQUIRED TO NECESSARIL Y RECORD HIS DISSATISFACTION ON THE CLAIM OF THE ASSESSEE U/S 14 A(2), WHETHER DETAILS WERE FILED OR NOT, BEFORE TAKING RECOURSE T O RULE 8D. EVEN THE SPECIAL BENCH RELIED UPON BY THE LD. AO MENTION S ABOUT 'SATISFACTION' OF THE AO BEFORE PROCEEDING WITH THE DISALLOWANCE. THIS HAS NOT BEEN DONE. THIS IS ALSO NOT A CASE OF ONE INDIVISIBLE BUSINESS GIVING RISE TO TAXABLE INCOME AS WELL AS E XEMPT INCOME. NEITHER IS THIS A CASE OF THE ASSESSEE COMPANY DEAL ING IN SEVERAL SHARES, MUTUAL FUNDS OR SECURITIES. AS SUCH, I FIND MERIT IN THE CONTENTION RAISED BY THE APPELLANT. NEEDLESS TO SAY , FOR MAKING ANY DISALLOWANCE WHICH IS NOT ARBITRARY OR ARTIFICIAL, IT MUST BE BASED ON SOME REAL AND SUBSTANTIAL MATERIAL. THE COURTS INCL UDING THE JURISDICTIONAL HIGH COURT IN THE CASE OF HERO CYCLE S LTD. (2010) 323 ITR 518 ( P&H) HAVE HELD THAT NO DISALLOWANCE CAN B E MADE ON ESTIMATE BASIS, THAT, THERE HAS TO BE A CATEGORICAL FINDING WITH REGARD TO EXPENDITURE INCURRED ON EARNING THE EXEMP TED INCOME. IN WIMCO SEEDLINGS LTD. VS DCIT (109 TTJ 9(DEL)TM 462, THE HON'BLE TRIBUNAL INTER-ALIA HELD THAT THE SECTION 14A CANNO T BE EXTENDED TO DISALLOW EVEN EXPENDITURE WHICH IS ASSUMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF EARNING THE TAX FREE INCOME. 12. THEREFORE, AS DISCUSSED IN THE PRE-PAGES, THER E HAS BEEN A CHANGE IN THE LAW AS REGARDS THE APPLICABILITY OF R ULE 8D. THE DECISIONS OF THE SPECIAL BENCHES STANDS REVERSED BY THE HIGHER JUDICIAL FORUM AND THOUGH NOT JURISDICTIONAL HIGH C OURT, AN INTERPRETATION OF LAW HAS BEEN GIVEN WHICH IMPLICIT LY OVER RULES THE DECISION OF SPECIAL BENCH INCLUDING JURISDICTIONAL SPECIAL BENCH. IT IS ALSO SETTLED LAW THAT DISALLOWANCE U/S 14A IS TO BE ON BASIS OF A CATEGORICAL FINDING THAT EXPENDITURE HAS' BEEN INCU RRED FOR EARNING THE EXEMPTED INCOME. CONSEQUENTLY, AFTER A CAREFUL CONSIDERATION OF THE FACTS OF THE CASE AND THE LEGAL POSITION, I HOLD THAT APPLICATION OF THE PROVISIONS OF SECTION 14A R/W RULE 8D BY THE LD. AO FOR MAKING THE DISALLOWANCE IS NOT ACCEPTABLE. FURTHERM ORE, I AM OF THE OPINION THAT THERE IS NO MATERIAL ON RECORD TO SUBSTANTIATE ANY FURTHER DISALLOWANCE UNDER THE PROVISIONS OF SEC. 1 4A BY THE AO. AS SUCH, THE DISALLOWANCE MADE BY THE LD. AO IS DEL ETED. ASSESSEE SUCCEEDS IN GROUNDS OF APPEAL NO.3. ITA N OS. 1934 & 1935/DEL./2012 7 4. THE REVENUE IS NOW IN APPEAL BEFORE US A GAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR SUPPORTED THE FINDINGS OF THE AO WHILE CONTENDING THAT THE ASSESSEE DID NOT FURNISH ANY CASH FLOW STATEME NT IN RESPECT OF INVESTMENT IN THE AFORESAID FUNDS IN THESE TWO ASSESSMENT YEARS NOR THE RELEVANT DETAILS OF EXPENDITURE INCURRED SO AS TO ENABLE THE AO TO REC ORD HIS SATISFACTION REGARDING THE WORKING ADOPTED BY THE ASSESSEE FOR ASCERTAINI NG DISALLOWANCE U/S 14A OF THE ACT. ON THE OTHER HAND, THE LD. AR ON BEHALF OF THE ASSESSEE SUPPORTED THE IMPUGNED ORDER WHILE CONTENDING THAT INVESTMENT OF ` 10CRORES IN PRUDENTIAL ICICI FMP SERIES-35-3 MONTHS PLAN C AND ` 23 CRORES IN PRUDENTIAL ICICI LIQUID PLAN INSTITUTIONAL PLUS-GROWTH SERIES -34 WAS MADE IN TH E PERIOD RELEVANT TO THE AY 2007-08 BESIDES INVESTMENT OF 13.93 CRORES IN PRUD ENTIAL ICICI FLOATING RATE PLAN-C BROUGHT FORWARD FROM THE PRECEDING YEAR. IN THE PERIOD RELEVANT TO AY 2008-09, THE ASSESSEE INVESTED ` 2 CRORES IN PRUDENTIAL ICICI REAL ESTATE SECURITIES FUND & ` 105,752,496/- IN TEMPLETON FLOATING RATE INCOME FUN D-LONG TERM PLAN BESIDES REINVESTMENT AS ALSO SUBSCRIPTION TOWARDS PRUDENTIAL ICICI FLOATING RATE PLAN-C TO THE EXTENT OF ` 214,601,649/-. TO A QUERY BY THE BENCH, THE LD. AR DID NOT REPLY AS TO WHETHER ANY CASH FLO W STATEMENT OR SOURCES OF THESE INVESTMENTS WERE EXPLAINED BEFORE THE AO IN T HE RELEVANT YEARS AND INSTEAD SUBMITTED THAT THE ASSESSEE MADE ORAL SUBMI SSIONS BEFORE THE AO BESIDES REPLY IN TERMS OF A NOTE ,A COPY OF WHICH IS PLACED ON PAGE 28 OF THE PAPER BOOK. HOWEVER, AFTER DISCUSSION, BOTH THE PAR TIES AGREED THAT THE ISSUE REQUIRES RECONSIDERATION BY THE AO IN THE LIGHT OF VARIOUS JUDGMENTS INCLUDING THOSE OF THE HONBLE JURISDICTIONAL HIGH COURT. 5. WE HAVE HEARD FOR BOTH THE PARTIES AND GONE T HROUGH THE FACTS OF THE CASE. INDISPUTABLY, THE AO DISALLOWED THE AFORE SAID AMOUNT INVOKING PROVISIONS OF SECTION 14A(2) OF THE ACT READ WITH R ULE 8D OF I.T. RULES, 1962,WITHOUT EVEN ANALYZING THE NATURE OF THE EXPE NDITURE NOR IT APPEARS THAT RELEVANT DETAILS OF EXPENDITURE AND ACCOUNTS WERE PLACED BEFORE THE AO OR THE LD. CIT(A). THE LD.AR MERELY INVITED OUR ATTENTION TO PAGE 28 OF THE PAPER BOOK ITA N OS. 1934 & 1935/DEL./2012 8 IN THE AY 2007-08 WHEREIN IT IS MENTIONED THAT NO I NTEREST COST WAS INVOLVED BECAUSE ONLY SURPLUS FUNDS WERE INVESTED AND NEITHE R ANY DIRECT OR INDIRECT COST WERE INCURRED FOR EARNING THE EXEMPT INCOME TO THE TUNE OF ` ` 1,61,44,244/- FROM ICICI PRUDENTIAL MUTUAL FUND, LIQUID PLAN ETC.. THE RE IS NOTHING TO SUGGEST AS TO WHETHER ANY CASH FLOW STATEMENT OR SOURCES OF THE I NVESTMENTS IN THE VARIOUS FUNDS BY THE ASSESSEE IN THESE TWO ASSESSMENT YEARS WAS PLACED BEFORE THE AO OR THE LD. CIT(A) AND WHEN QUESTIONED BY US THE LD. AR SUBMITTED THAT THE MATTER BE RE-EXAMINED BY THE AO IN THE RELEVANT YEA RS. APPARENTLY, THE ASSESSEE DID NOT FURNISH ANY DETAILS OF EXPENDITURE INCURRE D FOR MANAGEMENT AND SUPERVISION OF AFORESAID INVESTMENTS IN THE AY 2007 -08 WHILE IN THE AY 2008-09, THE ASSESSEE ITSELF STATED THAT AN EXPENDITURE OF ` 2,13,610/- ALONE WAS INCURRED. IN ANY CASE, NO MATERIAL WAS PLACED BEFORE THE AO IN ORDER TO ENABLE HIM TO RECORD HIS SATISFACTION WHILE THE LD.CIT(A) CONCL UDED THAT THE AO WAS REQUIRED TO RECORD HIS SATISFACTION ON THE CLAIM OF THE ASSE SSEE U/S 14A(2) OF THE ACT, IRRESPECTIVE OF THE FACT OF FILING OF DETAILS OR OT HERWISE. HONBLE APEX COURT IN KANTAMANI VENKATA NARAYANA AND SONS V. FIRST ADDL. ITO [1967] 63 ITR 638 AND AGAIN IN MALEGAON ELECTRICITY CO. P. LTD. V. CI T [1970] 78 ITR 466 (SC) OBSERVED THAT IT IS THE DUTY OF THE ASSESSEE TO BRI NG TO THE NOTICE OF THE INCOME TAX OFFICER PARTICULAR ITEMS IN THE BOOKS OF ACCOUN T OR PORTIONS OF DOCUMENTS WHICH ARE RELEVANT. THE LAW CASTS A DUTY ON THE AS SESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR HIS ASSESSM ENT FOR THAT YEAR. NOT EVEN A WHISPER HAS BEEN MADE BEFORE US AS TO WHETHER OR NO T RELEVANT ACCOUNTS WERE PLACED BEFORE THE AO OR THE LD. CIT(A) IN ORDER TO ENABLE THEM TO EXAMINE THE CLAIM OF THE ASSESSEE. THE LD. CIT(A) MERELY REFERR ED TO CERTAIN DECISIONS IN RELATION TO THE DISALLOWANCE WITHOUT EVEN EXAMININ G THE RELEVANT ACCOUNTS OR ASCERTAINING THE RELEVANT FACTS AND CIRCUMSTANCES . 5.1. HONBLE BOMBAY HIGH COURT IN THE CASE OF GOD REJ & BOYCE MANUFACTURING COMPANY LTD. (SUPRA) WHILE ADJUDICATING A SIMILAR ISSUE IN THE CONTEXT OF PROVISIONS OF SEC. 14A OF THE ACT AND RULE 8D OF THE IT RULES,1962 CONCLUDED THAT RULE 8D, INSERTED W.E.F 24.3.2008 ITA N OS. 1934 & 1935/DEL./2012 9 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENAC TS AN ARTIFICIAL METHOD OF ESTIMATING EXPENDITURE RELATABLE TO TAX-F REE INCOME. IT APPLIES ONLY W.E.F AY 2008-09. FOR THE ASSESSMENT Y EARS WHERE RULE 8D DOES NOT APPLY, THE AO WILL HAVE TO DETERMI NE THE QUANTUM OF DISALLOWABLE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO ALL THE FACTS AND CIRCUMSTANCES, THE HONBLE HIG H COURT CONCLUDED. 5.2 HONBLE SUPREME COURT IN THEIR DECISION DATED 6.7.2010 IN CIT V. WALFORT SHARE & STOCK BROKERS (P.) LTD.,326 ITR 1, INTER ALIA, OBSERVED THAT FOR ATTRACTING SECTION 14A OF THE ACT THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RE LATIONSHIP WITH THE TAX EXEMPT INCOME. THE THEORY OF APPORTIONMENT OF E XPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A, HONBLE APEX COURT CONCLUDED. 5.3 HONBLE PUNJAB & HARYANA HIGH COURT IN THE IR DECISION IN CIT VS. HERO CYCLES LTD.,323 ITR 518 HAVE OBSERVED THAT DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE AND WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A C ANNOT STAND. 5.4 IN CHEMINVEST LTD. V. INCOME-TAX OFFICER,317I TR(AT)86,SPECIAL BENCH HELD THAT WHEN THE EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER THE DISALLOW ANCE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARNED BY THE ASSESSEE OR NOT AND THE PROVISIONS OF SEC. 14A OF THE ACT DO NOT ENVISAGE ANY SUCH EXCEPTION. ITA N OS. 1934 & 1935/DEL./2012 10 5.5 HONBLE JURISDICTIONAL HIGH COURT IN A RECEN T DECISION DATED 18.11.2011 IN MAXOPP INVESTMENT LTD. VS. CIT,[2011] 15 TAXMANN.CO M 390 (DELHI) HELD AS UNDER: '41. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEE N, STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME 'IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED'. OF COURSE, THIS DETERMINATION CAN ONLY BE UNDERTAKEN IF THE ASSESSI NG OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 14A(2) WHICH EXPL ICITLY REQUIRES THE FULFILLMENT OF A CONDITION PRECEDENT IS ALSO IMPLIC IT IN SECTION 14A(1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14 A. IT IS ONLY THE PRESCRIPTION WITH REGARD TO THE METHOD OF DETERMINING SUCH EXPEN DITURE WHICH IS NEW AND WHICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, S ECTION 14A, EVEN PRIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) & (3) WOULD RE QUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGA RD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH REJECTION MUST BE FOR DISCLOSE D COGENT REASONS. IT IS THEN THAT THE QUESTION OF DETERMINATION OF SUCH EXP ENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSING OF FICER WAS FREE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 42. THUS, THE FACT THAT WE HAVE HELD THAT SUB-SECTI ONS (2) & (3) OF SECTION 14A AND RULE 8D WOULD OPERATE PROSPECTIVELY (AND, N OT RETROSPECTIVELY) DOES NOT MEAN THAT THE ASSESSING OFFICER IS NOT TO SATIS FY HIMSELF WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGAR D TO SUCH EXPENDITURE. IF HE IS SATISFIED THAT THE ASSESSEE HAS CORRECTLY REF LECTED THE AMOUNT OF SUCH EXPENDITURE, HE HAS TO DO NOTHING FURTHER. ON THE O THER HAND, IF HE IS SATISFIED ON AN OBJECTIVE ANALYSIS AND FOR COGENT REASONS THA T THE AMOUNT OF SUCH EXPENDITURE AS CLAIMED BY THE ASSESSEE IS NOT CORRE CT, HE IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ON THE BAS IS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. IT WOULD BE APP ROPRIATE TO RECALL THE WORDS OF THE SUPREME COURT IN WALFORT (SUPRA) TO TH E FOLLOWING EFFECT:- ' THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A .' SO, EVEN FOR THE PRE-RULE 8D PERIOD, WHENEVER THE I SSUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST O F ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRE CTNESS OF SUCH CLAIM. IN CASE, THE ASSESSING OFFICER IS SATISFIED WITH THE C LAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, THE ITA N OS. 1934 & 1935/DEL./2012 11 ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASS ESSEE INSOFAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCER NED. IN SUCH EVENTUALITY, THE ASSESSING OFFICER CANNOT EMBARK UP ON A DETERMINATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 1 4A(1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH T HE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPO RTIONMENT.' . 5.6 AS ALREADY OBSERVED, IN THE INSTANT CASE, T HE ASSESSEE DENIED INCURRING ANY EXPENDITURE FOR EARNING INCOME, WHICH DOES NOT FORM TOTAL INCOME DURING THE COURSE OF ASSESSMENT PROCEEDINGS EVEN WH EN HUGE INVESTMENTS WERE MADE BY THE ASSESSEE IN SECURITIES . IN TERMS OF THE AFORESAID DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN MAXOPP INV ESTMENT LTD.(SUPRA), EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS B EEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, TH E AO IS REQUIRED TO VERIFY THE CORRECTNESS OF SUCH CLAIM. IN CASE , THE AO IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUN ITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SHALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO. HAVING DONE SO, THE AO HAS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT, HONBLE HIGH C OURT CONCLUDED . FOLLOWING THE VIEW TAKEN IN THIS DECISION, HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. MACHINO PLASTIC LTD IN THEIR DECISION DATED 28.2.2012 IN I TA NO. 92 OF 2011, RESTORED THE MATTER TO THE FILE OF THE AO, BEING HANDICAPPED BEC AUSE OF FAILURE OF THE ASSESSEE TO FURNISH RELEVANT DETAILS AND PARTICULAR S .IN THE INSTANT CASE ALSO, THE AO WAS HANDICAPPED, BECAUSE OF FAILURE OF THE ASSES SEE TO FURNISH RELEVANT DETAILS/PARTICULARS AND ACCOUNTS WHILE MAKING THE D ISALLOWANCE IN TERMS OF PROVISIONS OF SEC. 14A OF THE ACT. THERE IS NOTHING IN THE ASSESSMENT ORDER OR IMPUGNED ORDER AS TO WHETHER THE ASSESSEE PLACED T HE RELEVANT DETAILS & ACCOUNTS BEFORE THE AO NOR THE LD. CIT(A) SEEMS TO HAVE UNDERTOOK ANY EXERCISE TO ASCERTAIN THE DETAILS OF EXPENDITURE OB JECTIVELY IN MANAGING AND ITA N OS. 1934 & 1935/DEL./2012 12 SUPERVISING THE AFORESAID HUGE INVESTMENTS IN VARI OUS FUNDS & SECURITIES. EVEN WHEN ,A QUERY WAS RAISED BY US IN THAT RESPECT, THE LD. AR SOUGHT THAT MATTER BE RESTORED TO THE FILE OF THE AO. IN V IEW OF THE FOREGOING, WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FIL E OF THE AO FOR DECIDING THE ISSUE, AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF OUR AFORESAID OBSERVATIONS AND VARIOUS JUDICIAL PRONOUN CEMENTS, INCLUDING THOSE REFERRED TO ABOVE, AFTER ALLOWING S UFFICIENT OPPORTUNITY TO THE ASSESSEE NEEDLESS TO SAY THAT W HILE REDECIDING THE ISSUE, THE AO. SHALL PASS A SPEAKING ORDER, GI VING REASONS FOR HIS SATISFACTION OR OTHERWISE, AS POINTED OUT BY T HE HONBLE JURISDICTIONAL HIGH COURT IN THEIR DECISION IN MAXO PP INVESTMENT LTD (SUPRA). THE ASSESSEE IS ALSO DIRECTED TO FURNISH A LL THE RELEVANT DETAILS OF EXPENDITURE ACTUALLY INCURRED IN MANAGI NG AND SUPERVISING THE AFORESAID HUGE INVESTMENTS IN FUNDS & SECURITIES ALONG WITH RELEVANT ACCOUNTS AND CASH FLOW STATEMEN T. WITH THESE OBSERVATIONS, GROUND NO 1 IN THESE TWO APPEALS IS D ISPOSED OF. 6. GROUND NO.2 IN THESE APPEALS RELATE TO DISALLOW ANCE ON ACCOUNT OF ROYALTY. ON PERUSAL OF DETAILS, THE AO NOTICED THA T THE ASSESSEE PAID ROYALTY OF ` `16,17,267/- IN ASSESSMENT YEAR 2007-08 AND ` `84,81,307/- IN ASSESSMENT YEAR 2008-09. THE ASSESSEE IS STATED TO HAVE ENTERED IN TO TECHNICAL COLLABORATION AGREEMENT WITH STAR SYRINGE LTD., UK, FIRST LINE ME DICAL SUPPLIES INCOME, USA AND ESTAR TECHNOLOGIES LTD., ISRAEL. TO A QUERY BY THE AO, THE ASSESSEE REPLIED THAT THE ENTIRE AMOUNT WAS REVENUE IN NATURE. IT WA S FURTHER SUBMITTED THAT I) THE ROYALTY WAS PAID IN LIEU OF ONLY RIGHT OF USAGE FOR LIMITED PERIOD OF TECHNICAL KNOW HOW; II) NO OWNERSHIP RIGHTS PASSED ON TO ASSESSEE; AND. ITA N OS. 1934 & 1935/DEL./2012 13 III) NO RIGHT OF ENDURING NATURE OR ADVANTAGE OF E NDURING NATURE AROSE TO THE ASSESSEE.WHILE THE PAYMENT WAS DETER MINED ON BASIS OF SALES OF UNITS OF PRODUCT INTER ALIA, THE ASSESSEE RELIED UPON DECISIONS IN CIT VS. CIPLA INDIA LTD. ,69 ITR 692;CIT VS. BRITISH INDIA CORPN. LTD. 165 I TR 51;ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT 177 ITR 377;CIT VS. INDIA OXYGEN LTD. 218 ITR 337;CIT VS. IAEC (PUMPS) LTD. 232 ITR 316 A ND CIT VS. WAVIN (INDIA) LTD. 236 ITR 314. 6.1 HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND WHILE REFERRING THE DECISIONS IN THE CASE OF C IT VS. BRITISH INDIA CORPORATION LTD., 165 ITR 51 (SC); CIT VS. INDIAN OXYGEN LTD., 218 ITR 337 (SC); CIT VS. IAEC (PUMPS) LTD., 232 ITR 316 (SC); SOUTHERN SWITC H GEAR LTD. VS. CIT,232 ITR 359;JONAS WOODHEAD AND SONS (INDIA) LTD. VS. CI T,224 ITR 342(SC); TRANSFORMER & SWITCHGEAR LTD. VS. CIT (1976) 103 IT R 352 (MADRAS); FENNER WOODROFFE & CO. LTD. VS. CIT (1976) 102 ITR 665 AND M.R. ELECTRONIC COMPONENTS LTD. VS. CIT (1982) 136 ITR 305, DISALLO WED THE ENTIRE AMOUNT OF ` `16,17,267/- ON ACCOUNT OF ROYALTY, TREATING THE SA ME AS CAPITAL IN NATURE, HAVING BEEN INCURRED TOWARDS ACQUISITION OF INTANGIBLE ASS ETS UNDER THE AFORESAID COLLABORATION AGREEMENT AND ALLOWED DEPRECIATION ON THE SAID AMOUNT 6.2 SIMILARLY, IN ASSESSMENT YEAR 2008-09 DISALLOW ED AN AMOUNT OF ` `84,81,307/- WHILE ALLOWING DEPRECIATION @25% THE REON. 7. ON APPEAL, THE LD. CIT(A) ALLOWED THE CLAIM WHI LE FOLLOWING THE DECISION OF THE ITAT IN THE ASSESSEES OWN CASE FOR THE AYS 2005-06 AND 2006- 07, HOLDING AS UNDER IN THE AY 2007-08:- 18. THE AUTHORIZED REPRESENTATIVE INFORMED THAT SI MILAR DISALLOWANCES HAD BEEN DELETED BY THE HON'BLE ITAT NEW DELHI FOR A.Y 2005-06 AND A.Y 2006-07 WHILE REITERATING ITS S UBMISSION AS TO ITA N OS. 1934 & 1935/DEL./2012 14 THE NATURE OF THE EXPENDITURE TOWARDS ROYALTY. THE COPIES OF ORDERS OF THE HON'BLE ITAT FOR A.Y 05-06 AND 06-07 WERE FU RNISHED. PARA 4 & 5 OF THE ORDER FOR A.Y 06-07 IS REPRODUCED BELOW: - WE HAVE HEARD THE RIVAL SUBMISSIONS AND WE FOUND T HAT SIMILAR DISALLOWANCE WAS DELETED BY THE TRIBUNAL IN RESPECT OF A. Y 2005-06 VIDE AFOREMENTIONED ORDER DATED 8 TH MAY, 2009 THE RELEVANT PORTION OF WHICH IS REPRODUCED BELOW:- 'GROUND NO.3 IS AGAINST DISALLOWANCE OF RS. 1,62,770/- BEING 25% OF THE ROYALTY PAYABLE CONSIDERING IT AS A CAPITAL EXPENDITURE. THE FACTS ARE THAT THE ASSESSEE COMPANY ENTERED INTO TECHNICAL COLLABORATION OF AGREEMENT WITH STAR SYRINGES LT D (LICENSOR). UNDER THE AGREEMENT, THE LICENSOR GAVE TECHN ICAL ASSISTANCE IN RELATION TO ASSEMBLY MANUFACTURE, DISTRIBUTIO N AND SALE OF PRODUCTS. THE ASSESSEE WAS REQUIRED TO PAY ROYALTY @ 5% OF SALE PRODUCT. THE AO HELD THAT THE AGREEMENT IS FOR 10 YEARS WHICH CAN BE RENEWED FURTHER. THE ASSESSEE HAS ACQUIRED KNOW-HOW WHICH GIVES AN ADVANTAGE OF ENDURING NATURE. APPLYING THE DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR S LTD., 148 ITR 272, 25% OF THE TOTAL ROYALTY EXPENSES WERE CONSIDERED AS CAPITAL EXPENDITURE. THE SAME WAS CONFIRMED BY THE LEARNED CIT(A). THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASS ESSEE IS AN OLD ESTABLISHED COMPANY. ON 12.3.2001 IT ENTERED INTO AGREEMENT WITH STAR SYRINGES LTD. OWNS AND POSSESSES KNOW-HOW TECHNOLOGY FOR THE MANUFACTURING OF THE PRODUCT PRODUCED BY THE ASSESSEE NAMELY SYRINGES. ORIGINALLY THE ASSESSEE WAS MANUFACTURING DISPOSABLE SYRINGES BUT NOW THE ASSESSEE WANTED TO MANUFACTURE SELF-DESTRUCTING SYRINGES. THE ROYALTY IS PAYABLE BECAUSE THE LICENSOR HAS GRANTED RIG HT IN LICENSE UNDER THE AGREEMENT OF KNOW-HOW TO MANUFACTURE , DISTRIBUTE AND SELL THE PRODUCT IN THE TERRITORY. TH E AGREEMENT IS FOR THE PERIOD OF 7 YEARS. AS PER CLAUSE 12.3 OF THE AGREEMENT, UPON THE TERMINATION OF THE AGREEMENT, THE LICENSEE SHALL FORTHWITH RETURN TO THE LICENSOR, ALL DE SIGNS AND DRAWINGS DATA MATERIAL OTHER DOCUMENTS ETC. IN ITS POSSESSI ON, WHETHER OR NOT CONTAINING KNOW-HOW.THEREFORE, THE ASSES SEE ITA N OS. 1934 & 1935/DEL./2012 15 CANNOT BE CONSIDERED TO BE THE OWNER OF SUCH KNOW-HOW MADE AVAILABLE BUT WAS MERELY GRANTED LICENCE FOR USING THE KNOW-HOW . IN SUCH A SITUATION THE AMOUNT PAYABLE BY WAY OF ROYALTY CANNOT BE CONSIDERED AS CAPITAL EXPENDITURE BUT EVE N PART THEREOF CANNOT BE CONSIDERED AS EXPENDITURE. THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTH ERN SWITCHGEAR LTD. (SUPRA) IS NOT APPLICABLE. THE LEARNED DR ON THE OTHER HAND, RELIED UPON THE APPE LLATE ORDER. SHE SUBMITTED THAT THE HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR LTD. (SUPRA) HAS UPHELD THE O RDER OF THE MADRAS HIGH COURT WHEREIN 25% TECHNICAL KNOW-HOW FEES WAS CONSIDERED AS CAPITAL EXPENDITURE. SHE ALSO RELI ED UPON THE DECISION OF THE HONBLE SUPREME COURT IN TH E CASE OF SCIENTIFIC ENGINEERING HOUSE P. LTD. VS. CIT 157 ITR 86. IN REPLY, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITT ED THAT THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SCIENTIFIC ENGINEERING HOUSE P. LTD. (SUPRA) WAS IN REFE RENCE TO A CONTROVERSY AS TO WHETHER THE DEPRECIATION IS ALLOWABL E ON THE DRAWINGS AND DESIGNS TO BE TREATED AS PLANT AND MACHINERY OR NOT. THIS FACT HAS BEEN CONSIDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SRIRAM PISTONS & RINGS LTD. VS. CIT, 171 TAXMAN 81. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THE ASSESSEE WAS GRANTED A LICENCE FOR USING THE KNOW-HOW TO BE APPLIED IN THE MANUFACTURING PROCESS. THE ASSESSEE WAS REQUIRED TO PAY ROYALTY FOR USING SUCH KNOW-HOW. HOWEVE R, THE ASSESSEE NEVER BECAME THE OWNER OF SUCH KNOW-HOW BUT WAS MERELY GRANTED A LICENCE TO USE THE SAME IN MANUFACTURING PROCESS. THE KNOW-HOW AT ALL THE TIME REMAINS THE PROPERTY OF THE LICENSOR. AT THE END OF THE LICENCE PERIOD THE ASSESSEE WAS TO FORTHWITH RETURN ALL TH E PLATES AND DRAWINGS, DATA MATERIAL AND OTHER DOCUMENTS SUPPLIED BY THE LICENSOR TO IT. THEREFORE, IN VIEW O F THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF C IT VS. CIBA OF INDIA LTD., 69 ITR 692 AND THAT BY THE HON BLE DELHI HIGH COURT IN THE CASE OF SRIRAM PISTONS & RINGS LTD. (SUPRA), THE PAYMENT IS TO BE CONSIDERED AS REVENUE ITA N OS. 1934 & 1935/DEL./2012 16 EXPENDITURE AND NO PART THEREOF CAN BE CONSIDERED AS CAPITAL EXPENDITURE. AS RIGHTLY CONTENDED BY THE LEARNED COUN SEL FOR THE ASSESSEE, THE DECISION OF HONBLE SUPREME COURT I N THE CASE SOUTHERN SWITCHGEARS LTD. (SUPRA) IS DISTINGUISHABLE ON FACTS. IN THE SAID CASE UNDER THE COLLABORATION AGREEMENT, THE ASSESSEE OBTAINED TECHNICAL KNOWLEDGE WHICH WAS AVAILABLE FOR ITS MANUFACTURING AND INDUSTRIAL PROCESSES EVEN AFTER THE TERMINATION OF THE AGREEMENT. THE TECHNICAL ASSISTANCE COVERS THE ESTABLISHMENT OF THE FACTORY AND THE OPERATION THEREOF FOR THE MANUFACTURE OF TRANSFORMERS OF ALL KINDS . THE FOREIGN COMPANY ALSO MAKES AVAILABLE TO THE ASSESSEE ITS PROCEDURES, DESIGNS, EXPERIENCE AND TECHNICAL KNOW-HOW FO R THE SAME. EVEN AFTER THE EXPIRY OF THE AGREEMENT, TH E ASSESSEE COULD USE THE METHOD OF PRODUCTION WHICH HAD BE EN MADE AVAILABLE TO IT IN PURSUANCE OF THE AGREEMENT. IN TE RMS OF THE SAID FACTS HONBLE MADRAS HIGH COURT TREATED PART O F THE EXPENDITURE NAMELY 25% AS CAPITAL EXPENDITURE WHICH WAS UPHELD BY THE HONBLE SUPREME COURT. HOWEVER, THE F ACTS IN THE PRESENT CASE ARE DIFFERENT. SIMILARLY IN THE CASE O F SCIENTIFIC ENGINEERING HOUSE P. LTD. (SUPRA), THE DIS PUTE WAS NOT WITH REGARD TO CAPITAL OR REVENUE NATURE OF THE EXPENDITURE BUT WAS WHETHER THE ASSESSEE IS ENTITLED T O DEPRECIATION ON THE TECHNICAL KNOW-HOW OBTAINED. THUS, TH E CASE LAWS RELIED UPON BY THE LEARNED CIT(A) AND THE LEARNE D DR ARE DISTINGUISHABLE ON FACTS. WE, THEREFORE, DELET E THE DISALLOWANCE OF ` `1,62,770/-. AS THE ROYALTY EXPENSES PERTAINED TO THE SAME AGREEMENT , THEREFORE, THE AFOREMENTIONED ORDER OF THE TRIBUNAL WI LL FULLY APPLY TO THE PRESENT YEAR ALSO. RESPECTFULLY FOLLOWING THE SAID ORDER, THE RELEVANT PORTION OF WHICH HAS ALREADY BEEN REPRODUCED, WE FIND NO MERIT IN DEPARTMENTAL APPEAL WHICH RAISES ONLY ONE ISSUE REGARDING DELETION OF DISALLOWANCE MADE ON ACCOUNT OF ROYALTY. AS SIMILAR ISSUE HAS ALREADY BEEN DULY CONSIDERED B Y THE HONBLE ITAT,NEW DELHI IN ASSESSEES OWN CASE AND SINCE FAC TS AND CIRCUMSTANCES AND BASIS OF THE ADDITION FOR THE REL EVANT YEAR MADE BY THE AO ARE IDENTICAL, RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL TRIBUNAL , THE ADDITION MADE BY THE AO ON ACCOUNT OF ITA N OS. 1934 & 1935/DEL./2012 17 ROYALTY PAYMENT IS DELETED. ACCORDINGLY, THE ASSESS EE SUCCEEDS IN HIS GROUND OF APPEAL. 7.1 SIMILARLY IN THE AY 2008-09, THE LD. CIT(A) F OLLOWING HIS AFORESAID DECISION IN THE AY 2007-08, DELETED THE DISALLOWANC E. 8. THE REVENUE IS NOW IN APPEAL BEFORE US AGAIN ST THE AFORESAID FINDINGS OF THE LD. CIT(A). AT THE OUTSET, BOTH THE PARTIES AGR EED THAT ISSUE IS SQUARELY COVERED BY THE AFORESAID DECISION DATED 8.5.2009 O F THE ITAT IN ITA NO. 1866/DEL./2008 FOR THE AY 2005-06 & DATED 13.8.2010 IN ITA NO.2609/DEL./2010 FOR THE AY 2006-07. 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISIONS OF THE ITAT. T HE ISSUE BEFORE US IS AS TO WHETHER OR NOT THE AMOUNT ON ACCOUNT OF ROYALTY PAID BY THE ASSESSEE IN TERMS OF COLLABORATION AGREEMENTS, IS CAPITAL IN NATURE. CO-ORDINATE BENCHES HAVE ALREADY TAKEN A VIEW IN THIS RESPECT IN THE PRECEDI NG YEARS. INDISPUTABLY, THE FACTS AND CIRCUMSTANCES IN RELATION TO THE ROYALTY PAYMEN T ARE SIMILAR TO THE FACTS AND CIRCUMSTANCES OBTAINING IN THE AYS 2005-06 AND 2006 -07 WHEREIN THE ITAT IN THEIR ORDER DATED 8 TH MAY, 2009 FOR THE AY 2005-06 AND DATED 13.8.2010 FOR THE AY 2006-07 DELETED THE DISALLOWANCE. IN THE LIGHT OF VIEW TAKEN BY CO-ORDINATE BENCHES IN THE PRECEDING YEARS, ESPECIALLY WHEN THE REVENUE DID NOT PLACE BEFORE US ANY MATERIAL CONTROVERTING THE AFORESAID FINDINGS OF LEARNED CIT(A) NOR BROUGHT TO OUR NOTICE ANY CONTRARY DECISION, WE ARE NOT INCLINED TO INTERFERE. THEREFORE, GROUND NO.2 IN THESE TWO APPEALS IS DISM ISSED. 10. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US, ITA N OS. 1934 & 1935/DEL./2012 18 11. IN THE RESULT, THESE TWO APPEALS ARE PARTLY ALL OWED BUT FOR STATISTICAL PURPOSES. SD/- SD/- (RAJPAL YADAV) (A.N. PAHUJA) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NS COPY OF THE ORDER FORWARDED TO :- 1. ASSESSEE 2. ASSISTANT CIT,CENTRAL CIRCLE-II,FARIDABAD 3. CIT CONCERNED 4. CIT (A)(CENTRAL),GURGAON 5. DR, ITAT,C BENCH, NEW DELHI 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, DELHI ORDER PRONOUNCED IN OPEN COURT