Commissioner of Income Tax vs Metalizing Equipment Co. (P) Ltd.

N.P. Gupta, J.—These 10 appeals by the revenue are relating to different assessment years. Identical questions have been raised by the revenue in all the 10 appeals, but then in Appeals No. 51, 52 of 2005, 25, 38 and 40 of 2007, it was found by this Court that, as the question suggested by the revenue, being about admissibility of the deduction on account of guarantee commission, paid by the assessee to its directors and relatives, as decided by the learned authorities below, does not give rise to any substantial question of law, and the appeals had been admitted only on the question, as to whether on the facts and circumstances of the case the Tribunal is justified in allowing the claim of the assessee, on a very broadly stated principle, that to claim deduction u/s 35(1)(iv) in respect of capital expenditure incurred on R&D of assessee''s business, it is enough that the expenditure is incurred on purchase of plant and machinery to be used in R&D, without holding any enquiry into the question, as to whether such machines acquired for the purpose of R&D, at any time was to put to use for R&D, or development of the business of the assessee? On the other hand, appeals No. 63, 64, 65, 66 and 118 of 2007 have been admitted, only by framing the question, as to whether on the facts and circumstances of the case, the Tribunal was justified in confirming the order of Commissioner of Income- tax (Appeals) allowing the assessee''s claim of deduction of bank guarantee commission to its Directors and the relatives, ignoring the fact that these expenses were not incurred wholly and exclusively for the business purpose, and the bank advanced loans against the hypothecation of goods/assets of the company, and the assets are of substantial value? Thus, in this bunch of five appeals, the question relating to admissibility of deduction u/s 35(1)(iv) was not framed, while in the other bunch of five other appeals, the question about admissibility of deduction of bank guarantee commission paid to relatives of the directors, was specifically declined to be framed, it being pure finding of fact not giving rise to substantial question of law. It was observed that in that bunch of appeals being appeal Nos. 63, 64, 65, 66 and 188 of 2007, that it appears that attention was invited to the fact, that in the matters earlier to the assessment years in question, the Division Bench had not framed the question on the finding, that as to on what terms and conditions the creditor was persuaded to advance loans, but then it was observed, that reliance was placed by the revenue on a decision of Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. Commissioner Income Tax UP (No. 1): (1967) 43 ITR 57, wherein the Hon''ble Supreme Court has held, that so far final conclusion of the admissibility of an allowance is concerned, the same is a question of law.

It may be observed that we sent for 43 ITR , and find, that the volume is not relating to 1967, but it relates to 1961, and therein there is no judgment like Swadeshi Cotton Mills Company Limited v. Commissioner of Income Tax, however with the assistance of the learned Counsel for the parties, we could lay hands on the judgment in Commissioner of Income Tax, Madhya Pradesh, Nagpur and Bhandara Vs. Swadeshi Cotton and Flour Mills Private Ltd., , but then that judgment again is on an altogether different aspect, about admissibility of bonus and commission paid to the employees in a particular year. Thus, it appears, that there is communication gap somewhere, between what the learned Counsel appears to have submitted, and what the Court appeared to have received. However, despite best efforts, the learned Counsel for the revenue could not point out the judgment, laying down proposition, as contained in the order admitting the bunch of appeals, being appeal Nos. 63, 64, 65, 66 and 118. Be that as it may. The net result is that since in appeals No. 51, 52, 25, 38 and 40 framing of this question has specifically been declined, on the ground, that it being finding of fact, and in view of the discussions made above, we do not find, that the Division Bench had the occasion to frame this question in the bunch of appeals bearing Nos. 63, 64, 65, 66 and 118. That apart, in our view also, the finding in this regard, is a pure finding of fact.

In addition, we may also observe, that this aspect of the controversy stands already covered by a decision of this Court, in Commissioner of Income Tax Vs. Ayurvedic Sevashram (P.) Ltd., wherein, on facts also, the assessee company had paid guarantee commission to the relatives of the Directors, who had secured finances for the company, and it was found that the deduction had resulted in remuneration to the relatives of the Directors of the Company. The guarantee commission was paid for securing finances, and thus the deduction was upheld.

In that view of the matter, de-hors the technicalities, even on merits, in view of the judgment of this Court in Ayurvedic Sevashram''s case, the finding on this question requires no interference by this Court.

Then we come to the question as framed in Appeals No. 51, 52 of 2005, 25, 38 and 40 of 2007, being on the anvil of Section 35 (1)(iv). On reading the question, it appears, that the question proceeds with pre-supposition, that the deduction has been allowed without holding any enquiry into the question as to whether such machines, acquired for the purpose of R&D, at any time was to put to use for R&D, or development of the business of the assessee. As against this, what we find is, that the orders are based on the basis of orders passed in earlier years, and in the basic order, we find, that the assessing officer himself had inspected the factory premises, and found, that the plant and machinery purchased, was being used by the assessee for the purposes of maintaining its quality control. Purchasing of plant and machinery is, thus, not in dispute, may be that appropriate accounting in this regard may not have been made, as some entries have been made later, but then, it has not been found by the assessing officer, that the items claimed to have been purchased were not purchased, or were not available, or were purchased in some other financial year, than the one in which credit is claimed.

This conclusion of the Assessing Officer, arrived on the basis of personal inspection of the Factory Premises by the Assessing Officer, has not been assailed by the revenue to be not correct, or to be requiring any interference, for us there is no escape from the conclusion that the items are used for quality control in R&D. That being the position, in our view, it cannot be said that the deduction is allowable, without holding any enquiry, into the relevant question. It has been found by the learned Commissioner that the assessee does hold recognition from the concerned department of the Government, to which it is regularly furnishing tri-annual returns, and the recognition did subsist during all the relevant assessment years.

In view of the above discussion, the question as framed is required to be answered in affirmative, i.e. that the learned tribunal was correct in allowing the deduction. Obviously it is answered against the revenue and in favour of assessee.

The net result is, that we do not find any force in any of these appeals, the same are consequently dismissed.