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Pre-commencement income: Letting know-how
November, 17th 2007

ITO vs Adani Port Ltd.
Citation 111 TTJ 593
108 ITD 1
 
Pre-commencement income: Letting know-how
Pre-commencement expenditure: Acquisition of know-how
The assessee company was setting up a port at Mundra in Gujrat. It had acquired certain know-how for setting up the port. The expenses incurred on the acquisition of know-how were capital expenditure. In the meanwhile it let its know how to be used by the Gujarat Maritime Board (GMB) for a fee. The fee received was assessable as income. The depreciation on know-how and other expenses incurred on acquiring the know-how to the extent these were let to GMB were deductible. The case was remanded to the AO to determine the specific expenditure relatable to letting know-how to GMB and then allow it.


ITAT, Ahmedabad

ITO vs Adani Port Ltd.

IT Appeal Nos. 965 and 1302 (Ahd.) of 2001 Assessment Years 1997-98 and 1998-99

R.P. Garg, Vice President as a Third Member I.S. Verma, Judicial Member and Sanjay Arora, Accountant Member

4 May 2007

Banwarilal, A.A. Shanker and Y.B. Oza for the Appellant
S.N. Soparkar and Urvashi Shodhan for the Respondent

ORDER

Per I.S. Verma, Judicial Member - Both these appeals by the revenue are against the orders of CIT(Appeals)-III, Ahmedabad dated 21-3-2001 and 19-1-2001 passed for assessment years 1998-99 and 1997-98 respectively wherein following grounds have been raised :-

ITA No. 1302/Ahd./2001 (for assessment year 1998-99)

(1) The Ld. CIT(A) has erred in law and on facts of the case in deleting the addition of Rs. 69,26,956 made by the Assessing Officer on account of contract receipt and technical consultancy fees.

(2) On the facts and circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer.

(3) It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing Officer be restored to the above extent.

ITA No. 965/Ahd./2001 (for assessment year 1997-98)

The Ld. CIT(A) has erred in law and on facts of the case in deleting the addition of Rs. 55,06,413 made by the Assessing Officer on account of contract receipt and technical consultancy fees.

On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.

It is therefore prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing Officer be restored to the above extent.

2. Since both these appeals of the revenue relates to same assessee and involved common issues, we, for the sake of convenience, have decided to dispose of these two appeals by this common/consolidated order.

3. We have heard the parties.

4. Since assessment order for assessment year 1997-98 is the leading order, so, we shall decide the issues on the basis of facts and circumstances as revealed from the records for the assessment year 1997-98.

5. The brief facts, as have been revealed from the records are that the assessee-company had furnished its return of income for assessment years 1997-98 and 1998-99 declaring NIL income (in both the returns) on 20-11-1997 and 17-3-1999 respectively. In the statement of income filed along with returns, the assessee had put the following Note under the head "Business Income":-

"Since the company's post project is under implementation and has not started any commercial activity, no profit and loss account for the year ended on 31-3-1997 has been prepared. However, expenditure disclosed as pre-operative expenditure (pending allocation). Thus total income taken at Rs. NIL".

6. During the course of assessment proceedings, the Assessing Officer noticed that assessee was in the process of setting up of a port at Mundra in Kutch District of Gujarat and had not prepared Profit and Loss account for any of these two assessment years.

7. It was, further noticed that the assessee had, capitalized all the expenses incurred in previous year relevant to these two assessment years and have taken to the same under the head 'Pre-operative expenses' (pending allocations). On scrutiny of assessment year 1997-98, the Assessing Officer further noticed that the assessee had shown to have received following receipts:-

(i) Interest income from bank FDRs and LC Rs. 74,236
(ii) Contract receipt and technical fees received from Gujarat Maritime Board Rs.55,06,413
    Rs. 55,80,649

7.1 Receipts for assessment year 1998-99 were as under:-

(1) Interest income from L.C. Rs. 37,317
(2) Interest income from FDR Rs. 82,358
(3) Miscellaneous interest Rs. 58
(4) Miscellaneous Interest Rs. 1,19,733
(5) Contract Receipt and technical fees received from Gujarat Maritime Board Rs. 69,26,956
      Rs.70,46,689

8. Since the assessee had not drawn Profit and Loss account and had also not shown any income, the Assessing Officer, during the course of assessment proceedings, issued a show-cause notice to the assessee asking it to explain as to why, the aforesaid receipts should not be treated as income from other sources.

9. In response to show-cause notice for assessment year 1997-98, the assessee filed two replies dated 14-3-2000 and 24-3-2000 respectively.

9.1 In reply letter dated 14-3-2000, the assessee claimed that its case was covered by the decision of Hon'ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 3151 wherein the Hon'ble Supreme Court, according to assessee, distinguished certain cases just like as that of the company and has held that if certain income are of such nature, which goes to reduce the project cost, it has necessarily to be deducted from the computation of the project cost and it is not in the nature of income at all.

9.2 As per reply letter dated 24-3-2000, the assessee submitted that the receipt of technical fees from Gujarat Maritime Board is only because of the fact that the technical know-how was supplied to them by the assessee-company. According to assessee, the Gujarat Maritime Board being also the development of Port (small and medium size) through the State of Gujarat had required the assessee to supply the technical know-how, which the assessee had acquired for development of Government Port at Mundra.

10. The Assessing Officer, considered the assessee's submissions and came to the conclusion that the assessee's case was not covered by the decision of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra), rather was covered against it by the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 1721.

11. The Assessing Officer has, therefore, income was concerned, taxed the same by applying the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case (supra). The receipts on account of supply of technical know-how to Gujarat Maritime Board were taxed as income from other sources on the ground that the act of supply of know-how was not assessee's business. The relevant part of the Assessing Officer reads as under :-

"The assessee's above submissions are considered carefully. To prove the nexus between the technical services provided by the company to Gujarat Maritime Board has been actually used by the company the assessee was asked to produce the contract agreement for such purpose. The assessee company furnished the agreement with Gujarat Maritime Board. On going through the agreement it is seen that the Gujarat Maritime has entered into a consultancy agreement for detailed project report (Consultancy services) for the Port of Mundra with Adani Port Ltd. The very first clause reads as under :-

"(1) The GMB wishes to have provided the consultancy services for preparation of detailed project report for the Port of Mundra."

Further in the executive summary progress report one it is mentioned as under :

'Proposed location for berth at Navinal as suggested by GMB is good. However, this clashed with existing approved captive jetty under construction at Navinal by the Adani Group'.

Further a photocopy of the detailed map of the different Ports of Mundra, a photocopy of which forming part of the order. Annexure 'A' shows the locations of different ports located in that area shows the different location of the Jetty of GMB and proposed Jetty of Adani Port Ltd.

Thus the assessee's arguments that the technical fees received from the Gujarat Maritime Board is the reimbursement of expenses incurred by the company is not correct. Therefore, the expenses are not at all inexcably related with the setting up of the port by Adani Port Ltd. Therefore, it is very clear that the Hon'ble Supreme Court decision in the case of Bokaro Steel Ltd. is not applicable in the facts of this case.

As far the interest income of Rs. 74,236 is concerned the assessee company itself has deducted this receipt from the pre-operative expenditure, which is capitalized. This very issue has been elaborately addressed by the Hon'ble Supreme Court in its decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT reported in [1997] 227 ITR 172. In that case the Hon'ble Supreme Court has held that such receipts of interest from short-term deposits, when the company is in the process of setting up of its project is a receipt of revenue in nature and it could not be set off against capital expenditure and should be treated as 'Income from other sources'. The assessee's reliance on the decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. reported in 102 Taxman 94 is not found acceptable as the facts of that case is entirely different from that of the case of the assessee. Further while deciding the issue in the case of Bokaro Steel Ltd. the Hon'ble Supreme Court has merely referred the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. and not reviewed or reversed its earlier decision.

On the contrary, while deciding the case of Bokaro Steel Ltd., the Hon'ble Supreme Court in its order at paragraph 4 has observed as under :

'During the assessment year, the respondent assessee had invested the amounts borrowed by it for the construction work which were not immediately required short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this findings which is given against it. In any case, this question is now concluded by a decision of this court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172. Hence we are not called upon to examine that issue.'

In view of this fact the assessee's reliance on the decision of Bokaro Steel Ltd. is totally misplaced as the facts and situation are entirely different. Whereas this issue is squarely covered under the Hon'ble Supreme Court's decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. I, therefore, treat the interest income received by the company of Rs. 74,236 as its income from other sources, and is taxed accordingly.

As far the receipt of contract receipt and technical consultancy fees of Rs. 55,06,413 is concerned, the same is in fact, received by the company from two parties i.e., Gujarat Maritime Board and Eastern Generation Ltd. Since the assessee company is in the process of setting up of a part, for this purpose it has entered into agreements with different foreign agencies to provide the necessary technical know-how, consultancy and related work. The Gujarat Maritime Board is also providing technical know-how to various ports throughout Gujarat State for preparing feasibility study report, detailed project report etc. particularly for the Port of Mundra. However, the company had access of superior technical know-how in this field because of its contracts with foreign agencies. The Gujarat Maritime Board and another party named Eastern Generation Ltd. were interested in having the benefit of such information, technical know-how and of such consultancy for the purpose of the development of various ports in Gujarat and, therefore, entered into a contract with the assessee company to provide technical know-how and consultancy. The TDS has also been deducted from such payment by the concerned parties. A perusal of the TDS certificate and accompanying challans for payment of tax, it clearly shows that it is for the contract entered with the company. Name of the contractor is given as 'Adani Port Ltd.' in the said certificate. Since the business of the company is of setting up of a port, and since no PandL a/c is drawn, the contract receipt is necessarily and income from independent source and it can never be said as inextricably linked with setting up of a port. Therefore, on the basis of the facts of this case the decision of Bokaro Steel Ltd. is not applicable here. The claim of the assessee to set off huge expenses incurred against these receipts is also not correct. The expenses incurred are capital expenses in nature which is very correctly being capitalized as preoperative expenses.

In view of the above facts, since the contract receipt is revenue receipt in nature, and as there is no business activity during the year as claimed by the assessee, there cannot be any business income, these receipts is, therefore, required to be tax as "income from other source" respectfully following the spirit of the order of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. which is squarely covered in this case, I tax the amount of Rs. 55,06,413 as 'income from other sources'.

The expenses incurred for getting access of such technical know-how by the company is connected with the setting up of the project, which is capital in nature and hence it cannot be said that any part of this expenses is connected with the earning of the above income. Hence no expenses is to be allowed from such income determined as 'income from other sources'."

12. The assessee went in appeal before the CIT(Appeals) and submitted written submissions running in 10 pages, copy placed at page Nos. 1 to 10 of the assessee's paper-book. The CIT(Appeals), after considering the submissions made by the assessee sustained the taxability of interest amounting to Rs. 74,236, after following the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra), but deleted the addition of Rs. 55,06,413 being the receipt from Gujarat Maritime Board, after holding that the expenses incurred by the assessee, which were verifiable and were found to have been exclusively incurred for the purposes of acquiring of know-how, which was shared with Gujarat Maritime Board being in excess of the receipt, there was no income form other sources at all. The relevant part of the order of the CIT(Appeals) for assessment year 1997-98 as contained in paragraph No. 4, reads as under :-

"4. I have very carefully considered the submissions of the AR and perused the material available on record. I have also gone through the case laws relied upon by the appellant and the Assessing Officer. I have also gone through the relevant agreement. On consideration of the entire facts, I agree with the learned Authorised Representative that so far as the receipt of Rs. 55,06,413 is concerned the said amount never forms part of the Profit and Loss Account, and thus, there is no reason to presume that the assessee has earned any income by way of consultancy fee. The bills for such fees clearly show that they were with reference to the project report for Mundra Port consultancy fees. Thus the payments was made by the GMB for the project report to the appellant company. The appellant had planned out to establish a port and for this purpose, the appellant was studying various factors through international agencies and incurred huge expenditure for such study. The assessee was thus having detailed analysis and report on the subject. The Government of Gujarat had availed the services of the appellant for development of Mundra Port to utilize such information/knowledge/reports collected and developed by the appellant. The fees received from such services was credited by the pap is a separate account GMB Consultancy Works. Thus, the fees were received for use of knowledge/data/information which was collected by the appellant by engaging the services of various entities for which huge expenses are incurred by it. Thus, such fees were, in fact, recovery of such expenses incurred by the appellant from the Government organization namely GMB. Therefore, I am of the firm opinion that such receipts should go to reduce the cost by way of such expenditure or otherwise the expenditure incurred by the appellant for obtaining such report/data/information has to be considered as deduction against such income because it has direct relation with the receipts of the appellant. The appellant has specifically maintained separate account which suggest that there was no taxable income. It is not the main activity of the assessee to provide such services. The assessee has in fact undertaken the development and construction of the port at Navinal Island. The Assessing Officer was confused that the development of Mundra was different from that of Navinal Island. Since the whole area was to be developed by GMB, they, instead of incurring expenditure for consultancy, asked the appellant to provide information collected and gathered by it to them which will help the development of Port of Mundra which includes Navinal area. The entire jetty is owned by GMB and only a licence has been granted to appellant. Thus the entire project will be ownership of GMB and there is no reason to consider the receipt of the appellant as it's income. Considering all these aspects, the receipt by the appellant from GMB was sharing of expenditure. Considering all these, I am of the view that, in any case, such receipt could not be taxed in isolation without giving deduction for the expenditure incurred for gathering the details report etc. by the appellant. Thus, this receipt has to be considered as reimbursement of the project expenses of the appellant. Accordingly, I hold that the Assessing Officer was not justified in considering this income in isolation. The ratio of the decision of the Supreme Court in Bokaro Steel Ltd. fully applicable to the present case. Even otherwise, the said gross receipt has to be considered net of expenses. Here, the expenses are also verifiable and are found to be exclusively incurred for the purpose of information and know-how, now being shared with GMB. In view of the fact that the expenditure is far exceeding such receipt, there is no income from other sources at all, even on that score. The addition is deleted on that account also."

13. So far as assessment year 1998-99 is concerned, the ld. CIT(Appeals) again upheld the taxability of interest income, but deleted the addition of Rs. 69,26,956 (being the consultancy fees received from Gujarat Maritime Board for supply of technical information/know-how), after following his order for assessment year 1997-98.

14. The other few facts which are relevant for disposal of these appeals are that the assessee having procured the work for development of its own port had proceeded to acquire information, knowledge, know-how, etc. - termed as "technical know-how" from various overseas parties, after incurring huge expenses. The "technical know-how", so procured was to be utilized by the assessee for development its own port at sea-shore, i.e., development of Adani Port.

15. Before the assessee could use the "technical know-how" so procured for development of its own port, the Gujarat Maritime Board, a State's own body which was also in the business of development of ports in Gujarat approached the assessee to provide the "technical know-how" procured by it for the development of Gujarat Maritime Board's Ports and for this purpose, the assessee was to pay amounts which the assessee has termed as 'fees for supply of technical know-how and consultancy'.

16. In view of agreement between the assessee and Gujarat Maritime Board, the assessee supplied the consultancy/technical know-how procured by it from offshore parties for the use of development of Gujarat Maritime Board's ports and for that received an amount of Rs. 55,06,413 during the period relevant to assessment year 1997-98 and Rs. 69,26,956 during the period relevant to assessment year 1998-99.

17. It was in view of the above facts and circumstances of the case that the ld. counsel for the assessee, first of all, reiterated the submissions made before the CIT(Appeals) - copy of which has been placed at page Nos. 1 to 10 of the assessee's paper-book and read as under:-

"1. Submissions - The appellant had filed return of income for total income of Rs. Nil on 20-11-1997. The said return was processed under section 143(1)(a) wherein the Assessing Officer had made adjustment of the aggregate amount of Rs. 55,80,649. The appeal against the said intimation was decided by the CIT(A)-III, Ahmedabad vide order dated 29-1-1989 wherein the entire adjustment was deleted.

2. In the present order the Assessing Officer has made addition of Rs. 55,80,649 on account of the following :

(i) Addition of Rs. 74,236 being interest income from bank FDR.

(ii) Addition of Rs. 55,06,413 on account of contract receipt and technical consultancy fees.

The Assessing Officer has stated that the submissions made before him are considered by him. He says that to prove the nexus between the technical services provided by the company to GMB has been actually used by the company, the assessee was asked to produce the contract agreement for such purpose. He says that the argument that the technical fees received by the GMB is reimbursement of expenses incurred is not correct. Therefore the expenses are not on exceptionally relatable with the setting up of a port by Adani Port Ltd. Hence, in his view the decision of the Supreme Court in Bokaro's case is not applicable. As regards the interest the Assessing Officer refers to the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizer Co. Ltd. 227 ITR 172, he says that as held in that case the receipt of interest from short-term capital investment should be treated as income from other source.

The Assessing Officer says that the technical fees of Rs. 55.06 lakhs is in fact received by the company from two parties. He says that since the company is in process of setting up a port it has entered into an agreement with foreign agency to provide technical know-how consultancy related work. GMB is also providing technical know-how in Gujarat for preparing feasibility report and project report for port at Mundra. However, the assessee company had excess to superior technical know-how in this field because of the contracts with the foreign parties. The GMB and other parties were interested in having benefit of such information and technical know-how. Therefore, they entered into contract with assessee company for providing technical know-how. The Assessing Officer further states that the TDS has been deducted from such payments. In the challan of TDS it shows that it is for contract with the company. In this view of the matter the Assessing Officer says that since the business of the company is of setting up of a port and no profit and loss account is drawn, the contract received is necessarily income from independent source and it cannot be linked with setting up of a port. Hence according to him the Bokaro decision is not applicable. This income is taxed by him as income from other sources. He says that the expenses incurred for getting access to such technical know-how by the company has connection with the setting up of the project, which is capital in nature and hence any part thereof cannot be said to be in connection with the earning of income.

3. In this connection the appellant may refer to the following clarifications given in our appeal against intimation under section 143(1)(a) which may be considered.

'2.1 Regarding addition of Rs. 74,236 - The Assessing Officer, Companies Ward-7(1) while issuing intimation under section 143(1)(a) of the Income-tax Act has carried out the adjustment in respect of the amount of Rs. 74,236 being the interest earned by the assessee following the Supreme Court decision in the case of Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT reported in [1997] 227 ITR 172. In the case before the Supreme Court the facts were as under :

"The assessee was a company incorporated on 3-12-1971, for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash. The trial production of the factories of the company commenced on 30-6-1982. For the purpose of setting up of the factories, the company had taken term loans from various banks and financial institutions. That part of the borrowed funds which was not immediately required by the company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Up to the assessment year 1980-81, interest earned by the company from the various loans given by the Company and also from the bank deposits was shown as income and was taxed accordingly. For the accounting year ending on 30-6-1981 (assessment year 1982-83), the assessee received a total amount of interest of Rs. 2,92,440. In its return of income filed on 22-6-1982, the company disclosed the said sum of Rs. 2,92,440 as "income from other sources". It also disclosed business loss of Rs. 3,21,802. After setting off the interest income against the business loss, the company claimed the benefit of carry forward of net loss of Rs. 29,360. The company later on realised its mistake and on 26-12-1984, it filed a revised return showing business loss of Rs. 3,21,802. It claimed that according to the accepted accounting practice, interest and finance charges along with other pre-production expenses had to be capitalised, and that, therefore, the interest income of Rs. 2,92,440 should go to reduce the pre-production expenses (including interest and finance charges), which would ultimately be capitalised. During the previous year relevant to the assessment year 1983-84, the assessee had received interest income of Rs. 1,08,336. The assessee filed its return in which it claimed that the interest income of Rs. 1,08,336 should go to reduce the pre-production expenses including the interest and finance charges which would ultimately be capitalised. The Income-tax Officer rejected the assessee's claim that the interest income was not exigible to tax. The view of the Income-tax Officer was upheld by the Commissioner of Income-tax (Appeals). The company's further appeal to the Income-tax Appellate Tribunal was dismissed. In view of the conflict of decisions between the Madras and Andhra Pradesh High Courts, the Tribunal referred the question, regarding taxability of income, directly to the Supreme Court:" '

(From head notes)

On these facts it was held :

"Held, that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up of its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee. [Emphasis supplied]

In this connection reference is invited to the recent decision of the Supreme Court in the case of CIT v. Bokaro Steel Ltd. which is reported in 102 Taxman 94. In the said case the assessee received by way of :

(1) Rent charged by the assessee from contractors for housing workers and staff of contractor for construction work of the assessee.

(2) Hire charges for plant and machinery given to the contractors for use in the construction work of the assessee.

(3) Interest from advances made to the contractors for the purpose of facilitating the work of construction.

(4) Royalty for excavation and use of stones lying on the assessee's land for construction work.

It is held by the Supreme Court that the receipts being intrinsically connected with the construction of the assessee's plant, would be capital receipt and not an income from any independent source. It is held that it would go to reduce the cost of plant and could not be taxed as income.

Applying ratio of the above decision it may be appreciated that the interest of Rs. 74,236 would go to reduce the cost of the project and it is not independent of the activity of the establishing of the project of port.

In the present case the facts are that the assessee has earned interest in question as detailed below :

(1) Interest income from L.C. A/c. by SBT for 46 days Rs. 37,317
(2) Interest income on FDR from SBI Rs. 27,784
(3) Interest income on FDR provided @10% from 13-1-97 to 31-3-97 (77 days) Rs. 9,135
  Total Rs. 74,236

As mentioned in Note No. 1 below the Computation of Total Income, the income received by the assessee from such investment was not income from other sources as held in the case of Anand and Co. v. ACIT, Calcutta (54 ITR 82) (Cal.). Since in the present case the issue is not identical with that in the case before the Supreme Court in Tuticorin's case there is no justification in making the adjustment as made by the Assessing Officer.

2.2 Regarding addition of Rs. 55,06,413

(i) In connection with this issue the appellant may point out that the impugned amount of consultancy fees never forms part of the PandL account of the appellant company which was attached to the return of income. On the contrary in the notes on accounts it was clearly reported that the expenditure incurred during the construction period is carried forward and will be apportioned to the fixed assets on commencing of the project. It was further clearly pointed out that since the project is under implementation and the commercial activities are yet to commence, no PandL account has been prepared. In these circumstances, there was no reason for the Assessing Officer to presume that the appellant had earned any income by way of consultancy fees.

It is possible that this presumption is arrived at by the Assessing Officer for the reason that the appellant had submitted certificates for T.D.S. issued by Government of Gujarat undertaking; Maritime Board, Ahmedabad in Form No. 16A. However, on perusal of the certificates which are attached to the return of income it may be seen that the certificates are accompanied by challans for payment of T.D.S. by the Gujarat Maritime Board. On the face of the challans it is mentioned that it was with reference to detailed project report for Mundra Port Consultancy fees. Thus this payment made by the Gujarat Maritime Board was for the project report.

(ii) In the light of this fact, the correct nature of receipt may be considered. The appellant had, in fact, proposed to establish a Port viz. Adani Port on the Sea-shore. For this purpose, the appellant was studying various factors through international agencies also. The appellant had, therefore, utilised services of various agencies and incurred huge expenditure.

(iii) The Government of Gujarat was interested in having the benefit of such information and of such consultancy for the purpose of its proposed development of Mundra Port as well as other ports.

(iv) The appellant had in a separate account viz. GMB Consultancy works, credited these amounts received from the Government of Gujarat against the various expenses incurred by the appellant for the work. Thus, it is in fact, reimbursement of the expenses incurred by the appellant from the Government of Gujarat - Gujarat Maritime Board -and the same is not in the nature of any income earned by the appellant. Even if it is not considered as reimbursement of expenses then against this receipts the expenditure actually incurred and debited to that particular account should be considered. Detailed copy of such account is enclosed herewith. Such account which is specifically maintained for the purpose of undertaking the activity itself is very clear and suggests that there is no taxable income. The fact that the appellant had incurred these expenses for this activity can be appreciated from the various entries narrating the details in the said account. In these facts and circumstances there is no justification for making the adjustment of Rs. 55.06 lakhs by the Assessing Officer.

Therefore, there will not be any net income which could be added to the total income of the appellant.

(v) In this connection, the aforesaid grounds have to be viewed on the following lines :

(1) The first and foremost contention of the appellant is that the payments received from GMB is absolutely for the development of Mundra port and other ports. The development of the whole area of Mundra is the main object and that has to be satisfied. It is an admitted fact that it is not the main activity of the appellant at all for providing such services. On the other hand, during these years the only activity undertaken is development and construction of port and the development of Navinal Island area which is part and parcel of Mundra port. The Assessing Officer has confused that the development of Mundra (i.e., Port of Mundra) is different from that of Navinal Island. In view of the fact that the whole area has to be developed, GMB instead of incurring expenditure of consultancy asked the Adani Port Ltd. to provide information collected and gathered by Adani Port Ltd. to it which will also ultimately be helpful in development of port of Mundra which includes Navinal area. It may be noted that Navinal area is part of Mundra Port and this fact has not been taken into consideration.

(2) Moreover, it may be noted that the entire Jetty is owned by GMB and only licence has been granted to Adani Port Ltd. This fact has been grossly overlooked by the Assessing Officer for the simple reason that he wanted to make an addition.

(3) In view of the fact that the entire project is ultimately owned by GMB in the year under consideration, there is no reason to consider the aforesaid amount as an income of Adani Port Ltd. On the other hand, it is recovery of the expenditure that have already incurred on account of professional consultancy fees.

(4) It may be noted that during the course of the development of project of port some project information on technical side was gathered which was parted with GMB. If this simple aspect is also considered then this sharing of the expenditure is also not considered by the Assessing Officer.

(5) Once having concluded that the receipt is an income he has further grossly erred in treating the said income as income from other sources. It may be noted that the consultancy charges has to be considered as business income or professional income when there is undisputed fact that the appellant had simultaneously incurred expenditure for getting such information, knowledge, skill etc.

(6) It is undisputed fact that such information, knowledge/skill etc., was gathered by incurring substantial expenditure by the appellant. If this aspect is considered then the Assessing Officer ought to have allowed the expenditure incurred along with other administrative expenses.

(7) The Assessing Officer has gone to the extent of taxing the gross amount without considering the fact that large office and administrative resources along with number of technical persons are involved in obtaining such information, technical knowledge, skill etc. and also in passing of such information, technical knowledge, skill etc. to GMB. If this is considered then there will be Nil income. The details of which was already given to the Assessing Officer.

(vi) Thus it is recovery of expenses incurred for obtaining expert details by providing the same to GMB and hence also the amount so received from GMB has to be considered for adjustment against such related expenses which have been capitalized in books.

(vii) Without prejudice to above NET PROFIT only has to be estimated and such net profit cannot be more than reasonable amount of 8 per cent. Where is the reasonable rate ever accepted by statute in some of the other provision.

In view of the above facts and circumstances your goodselves are requested to allow the expenditure if the view is taken that the receipt is taxable either under income from other sources or business income under the head 'Income from profits and gains of business'.

4. Regarding interest under section 234B. It may be noted that now the Supreme Court has decided the issue of levy of interest under sections 234A, 234B and 234C. In view of the Supreme Court judgment in the case of Ranchi Club Ltd. [2000] 164 CTR (SC) 200 no interest under section 234B is chargeable. The addition which your goodselves are proposing to make is absolutely on the basis of change of opinion and therefore there is no question of initiating the proceedings for the levy of penalty under section 271(1)(c)."

17.1 In addition to above, the ld. counsel for the assessee tried to make out his case by way of an example relating to working textile industry and by submitting that if the assessee starts a project of establishing a textile industry and for that purpose it establishes utility facilities such as providing steam, etc. required for the purpose of textile fabrics and that utility facility is already established but the assessee could not start own its project and if in the meantime that facility is given to some outsider and it earns the income of Rs. 1 crore, then the expenditure incurred for establishing the utility facilities is deductible as business expenditure. In the same way in the present case when the assessee is in the process of establishing its business has gathered knowledge of establishing the said port for which it has incurred huge expenditure by way of payment of consultancy fees, etc. of Rs. 1,65,18,124, the same is deductible from the receipt on account of technical consultancy fees. In that case the income cannot be taxed by way of income from other source.

18. In a nutshell, the submissions of the ld. counsel for the assessee were two fold; namely,

(i) The amount received from Gujarat Maritime Board were on account of reimbursement of the expenditure incurred by the assessee for procuring technical know-how to be utilized for the development of Gujarat Maritime Board's Ports and, therefore, there was no question of assessee having received any revenue expenditure.

(ii) The second submission of the ld. counsel for the assessee, was that, if at all, the receipt is considered to be revenue receipt, then the same was a business receipt and, consequently, the assessee was entitled to all expenses incurred for earning these receipts. In other words, the assessee's case was that all the expenses incurred by the assessee for procurement of technical know-how, which was directly linked with these receipts as well as other expenses incurred for executing its obligation for supplying technical know-how to Gujarat Maritime Board are allowable and those expenses being more than the receipt, there was no question of assessee having any taxable income. In support of above, the assessee drew our attention towards two charts prepared for the period from 1-4-1996 to 31-3-1997 and 1-4-1997 to 31-3-1998, according to which the assessee had incurred an expenditure of Rs. 47,74,500 during assessment year 1997-98 and Rs. 70,511 during the assessment year 1998-99. The assessee's Counsel, further supported its claim by making reference to professional fees paid by it as booked in the books of account according to which the expenditure of Rs. 1,65,18,124 was claimed to have been incurred up to 31-3-1997, whereas the expenditure of Rs. 12,77,21,202 was claimed to have been incurred up to 31-3-1998.

19. It was, in view of the above facts and circumstances of the case, that the ld. counsel for the assessee submitted the orders of the CIT(Appeals). Reliance was, definitely, placed on the decision of Hon'ble Supreme Court in the cases of Bokaro Steel Ltd. (supra) and decision of CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 21.

20. The ld. DR, on the other hand, in addition to relying on the assessment order, submitted that so far as nature of receipt was concerned, the Assessing Officer was quite justified in considering the same as income from other sources. Coming to the assessee's claim of reimbursement of the expenses, the ld. counsel for the assessee submitted that it was not the case of reimbursement, because the know-how was procured by the assessee mainly and solely for the purpose of use in its own business; i.e., for development of its own port called as Adani Port and if the assessee had used that the technical know-how for development of other's port, the amount received for use of technical know-how for that purpose, cannot be reimbursement, rather is a revenue receipt and since the assessee's business was not of supply of technical know-how, the receipt was from other sources and was rightly taxed, as such.

21. Coming to assessee's claim of expenditure, the ld. DR submitted that all expenditure incurred by the assessee for procurement of technical know-how were of capital nature and assessee had also capitalized the same. He, therefore, vehemently submitted that expenditure incurred by the assessee, so far as procurement of technical know-how is concerned, was of capital nature which cannot be allowed against income from other sources.

22. The ld. DR, however, was fair enough to submit that if the assessee had ignored direct expenditure while supplying technical know-how to the Gujarat Maritime Board, such as, petrol expenses or telephone expenses, etc. then those expenses may be allowed. In support of his submission that expenditure incurred for procuring technical know-how was of capital nature, reliance was placed on the decision of Hon'ble Supreme Court in the case of Scientific Engineering House (P.) Ltd. v. CIT [1996] 157 ITR 861.

23. We have considered the rival submissions and the facts and circumstances.

23.1 First of all, we would like to consider the decisions relied upon by the parties and, therefore, proceed to do the same. The assessee has relied on the decision of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra) and decision in the case of Karnal Co-operative Sugar Mills Ltd. (supra), whereas the ld. DR has relied on the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) and decision in the case of Scientific Engineering House (P.) Ltd. (supra).

1. Decision of Hon'ble Supreme Court in the case of Bokaro Steel Ltd. (supra)

A. (a) The brief facts, as have been revealed from the reported case were that the assessee is a corporation wholly owned by the Government of India. It was assessed in the status of a company.

The assessee-company, Bokaro Steel Ltd., was incorporated in January, 1964. Its object was to construct and own an integral iron and steel works. During the assessment years under consideration, the work of construction of the company's factory and installation of the plant was in the process of completion. The company had not started any business during the assessment years in question.

(i) During this period the company had given to the contractors quarters for the residence of the staff and workers employed by the contractors who had been engaged by the assessee-respondent for carrying out the work of construction. The assessee charged the contractors for the use of the quarters so given to the contractors for the residence of his workmen who were engaged in the construction activity of the assessee's plant.

(ii) Secondly, during the assessment years in question the assessee had entered into supplementary agreements with its contractors under which the assessee had made certain advances to the contractors to enable them to execute the large scale construction work smoothly. The assessee had agreed to advance these advances to the contractors on payment of interest. The contractors thus did not have to raise funds from outside agencies. For the assessee-company, this arrangement primarily meant payment in advance of the amounts of the contractors' bills for which the assessee-company had charged interest. This interest was later adjusted against the dues of the contractors.

(iii) For the purpose of the construction work, the assessee had given on hire certain plant and machinery to the contractors. Against the letting of plant and machinery the assessee received from the contractors income in the form of hire charges. It was not the business of the assessee-company to let out plant and machinery to others. The assessee-company permitted its use only to its own contractors for the construction work done by the contractors for the assessee-company. The Tribunal has found that the assessee-company charged hire charges for such use of plant and machinery in order to cover the maintenance and wear and tear of the plant and machinery belonging to the assessee.

(iv) The assessee-company allowed the contractors to use the stones lying on the assessee's land for construction work. The stones lying on the assessee's company's land were the capital assets of the assessee-company. The assessee charged the contractor a certain amount by way of royalty for excavation and use of these stones for construction work.

(v) The assessee had, during the assessment year 1971-72, shown in its accounts as income from interest a certain sum said to have accrued to the assessee from Hindustan Steel Limited for eight locomotives supplied by the assessee-company to Hindustan Steel Limited. The assessee-company, however, reversed this entry in the next year because eight new locomotives were supplied by Hindustan Steel Limited to the assessee and no interest income actually accrued to the assessee.

A. (b) It was, in view of the above facts and circumstances of the case, that the Hon'ble Supreme Court, first of all, gave its findings with respect to the taxability of interest on short-term deposits and observed as under :-

"During these assessment years, the respondent-assessee had invested the amounts borrowed by it for the construction work which were not immediately required, in short-term deposits and earned interest. It has been held in these proceedings that the receipt of interest amounts to income of the assessee from other sources. The assessee has not filed any appeal from this finding which is given against it. In any case, this question is now concluded by a decision of this court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172. Hence, we are not called upon to examine that issue."

A. (c) The Hon'ble Supreme Court, further, proceeded to consider the taxability of rent charged by the assessee for providing housing to the staff employed by the Contractor who was to do construction work for the assessee, taxability of higher charges for Plant and Machinery given to the same contractor for use for the construction work for the assessee and of interest charged on advances given to the contractor for the purpose of facilitating the work of construction for the assessee.

A. (d) The Hon'ble Supreme Court, in the above facts and circumstances of the case, dismissed the revenue's appeal with respect to taxability of receipt from aforesaid three sources by holding as under:-

". . . that the first three heads of income were (i) the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and net income of the assessee from any independent source."

B. After having considered the facts and the decision in the case of Bokaro Steel Ltd. (supra), we, with respect to the Hon'ble Supreme Court, are of the opinion that the issue as well as facts, so far as receipts from three sources; namely, rent, higher charges for Plant and Machinery and interest advances to contractor were concerned, are quite distinguishable than the issue and circumstances of the present case to elaborate in the case before the Hon'ble Supreme Court, the income from all the three sources was on account of facilities provided by the assessee to the contractor who was to carry on construction work for the assessee; meaning thereby, that it was not the assessee who was to provide any service or was to receive any amount in lieu of any service. On the contrary, in the present case, it was the assessee who was provided the service to Gujarat Maritime Board in the form of providing "technical know-how" and arrange the facts as well as nature of receipts in the present case are on different footings. Consequently, we, with respect to the decision of Hon'ble Supreme Court, are of the opinion that the CIT(Appeals) was quite justified in holding that the decision in the case of Bokaro Steel Ltd. (supra) is not applicable to the present case.

2. Decision of Hon'ble Supreme Court in the case of Karnal Co-operative Sugar Mills Ltd. (supra).

A. The brief facts, as have been revealed from the reported case were that the assessee had deposited some money to open a Letter Credit for the purchase of the machinery required for setting up its plant in terms of assessee's agreement with the supplier and had earned some interest on such deposit. It was, not a case of deposit of surplus share capital money which could be lying idle and could be deposited in bank for the purpose of earning interest. Since the deposit of money was found to be directly linked with the purchase of Plant and Machinery, the Hon'ble Supreme Court held that the ratio laid down in Tuticorin Alkali Chemicals and Fertilizers Ltd.'s case (supra) was not applicable.

B. After careful consideration of aforesaid decision, we are of the opinion that this decision is applicable only to the taxability of interest from L/C or any other source where the deposit is directly linked to the purchase of machinery or plant, but in no case can be applied to the issue of taxability of receipts for the supply of technical know-how in the case before us; meaning thereby that this decision is also not helpful to the assessee - so far as taxability of receipt from Gujarat Maritime Board are concerned.

3. Decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra)

(A)(a) From the aforesaid two decisions of Hon'ble Supreme Court, it is very clear that decision in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) has not been overrules; meaning thereby, that ratio laid down in that decision is still hold good.

(B) So far as facts and ratio laid down is concerned, we do not consider it necessary to elaborate the same, but would like to state that as per the aforesaid decision of Hon'ble Supreme Court, the interest on short-term deposits made out of surplus share application or share money or borrowings raised by any other mode will be taxable as income from other sources and, therefore, the CIT(Appeals) was quite justified in sustaining the taxability of interest income. Thus, we have considered because the parties had referred to this decision, though issue relating to taxability of interest is not before us.

24. Coming to the assessee's main claim with respect to taxability of receipts from Gujarat Maritime Board for supply for know-how procured by the assessee from overseas parties by having incurred the expenses, first of all, we are of the opinion that this cannot be a case of reimbursement of expenses.

(i) It is, clear from the nature of capital assets used by the assessee for getting receipts from Gujarat Maritime Board that it was not of 100 per cent consumable nature; meaning thereby that the technical know-how procured by the assessee had not ceased to exist, simply because of its use for Gujarat Maritime Board. Even after having utilized the same for carrying on the work of development of Port for Gujarat Maritime Board, the assessee was still having know-how of the same degree/strength to be used for development of its own Port. Reimbursement of expenses can be if one purchases some consumable material on one hand and consumes the same on other hand in executing its business contractual obligation, though, of course, against certain payments. For example, if a contractor, is to execute the construction of a Port and for the purpose has to be purchased consumable items, such as, Iron and Steel, Cement and other consumable items and consumed the same in executing the contract work, then he is, definitely, entitled to set off of that expenditure against the receipt; meaning thereby that if the capital assets, used in executing a business contractual obligation, ceases to exist, then the receipt can be said to be reimbursement of the expenditure, but if the capital assets procured by an assessee, do not cease to exist, even after its use for execution of business contractual obligation to some other parties, though, of course, against some receipts, procurement of such receipt cannot be said to be reimbursement of the expenditure incurred for acquiring those capital assets.

25. Next question for consideration is as to what was the nature of expenditure incurred by the assessee for procuring the know-how under reference and for answering this question, we are of the opinion that the consideration of the decisions of Hon'ble Supreme Court in the case of Scientific Engineering House (P.) Ltd. (supra) on which reliance has been placed by the ld. DR for the proposition that expenditure incurred for procuring 'technical know-how' was of capital nature and cannot be said of against revenue receipt, is very important and, therefore, we proceed to consider the same as under :-

(i) The brief facts in this case, as have been revealed from the reported decision were as under:-

M/s. Scientific Engineering House (P.) Ltd. (hereinafter called "the assessee") was manufacturing scientific instruments and apparatus like dumpy levellers, levelling staves, prismatic compass, etc. It entered into two separate collaboration agreements, one dated March 15, 1961, and the other dated March 31, 1961, with M/s. Metrimpex Hungarian Trading Company, Budapest, for undertaking the manufacture of microscopes and theodolites, under which the said foreign collaborator, in consideration of payment of Rs. 80,000 each (Rs. 1,60,000 under both the agreements together), agreed to supply to the assessee all the, technical know-how required for the manufacture of these instruments. The object of both the agreements was to enable the assessee to manufacture the said instruments of certain specifications and the assessee thereunder acquired the right to manufacture in India under its own trade mark and name but under the licence - MOM Hungary - of the foreign supplier, the said instruments and the right to sell the same in India. To enable the assessee to manufacture these instruments in India in the manner just indicated, the foreign collaborator, inter alia, agreed to render "documentation service" by supplying to the assessee an up-to-date and correct complete set of each of the five types of documents (such as manufacturing drawings, processing documents, designs, charts, plans and other literature more specifically detailed in clause 3 of the agreements). There was also a provision enjoining the foreign collaborator to render training and imparting of knowledge of the know-how technique of manufacturing these instruments. Pursuant to the agreements, the assessee made full payment of Rs. 1,60,000 (Rs. 80,000 under each of the agreements) to the foreign collaborator and the latter rendered "documentation service" by supplying complete sets of all the documents including designs, drawings, charts, plans and other literature as per clause 3. The sum of Rs. 1,60,000 was debited by the assessee under the head "Library".

For the assessment year 1966-67 for which relevant accounting year ended on 30-9-1965, the assessee claimed a sum of Rs. 12,000 by way of depreciation on " library". Such depreciation was claimed on the ground that the payment of Rs. 1,60,000 had been made really for the outright purchase of designs, drawings charts and other literature which were voluminous occupying almirah - full of storage space and these collectively constituted the pages of a book and the assessee had claimed depreciation at the appropriate rate. The Income-tax Officer held that the sum of Rs. 1,60,000 did not represent the value of books purchased by the assessee but represented the price paid for acquiring the technical know-how which amounted to a capital expenditure but since no tangible or depreciable asset was brought into existence, no depreciation allowance could be claimed.

On appeal preferred by the assessee, however, the Appellate Assistant Commissioner held that what the assessee had done was to make an outright purchase of certain specimen drawings, charts, plans, etc., on special papers, that these documents when collected together constituted a book on which depreciation, as in the case of plant and machinery, would, at the appropriate rate, be allowable and he directed the Income-tax Officer to allow the depreciation claimed.

In the further appeal preferred by the Department, the Tribunal took the view that clauses 2, 3, 4, 5 and 10 of the agreements did not lend support to the stand taken by the assessee that payments (Rs. 80,000 each) had been made mainly for the supply of designs, drawings, charts, etc., that the services to be rendered by the foreign collaborator covered a wide field and that the supply of designs, charts, drawings, etc., was incidental and only in furtherance of other services which the foreign collaborator was expected to render. It further took the view that since the supply of designs, drawings, charts, etc., was only incidental and the payment of Rs. 1,60,000 could not entirely be held to represent the purchase price of those documents, it was unnecessary for them to go into the question whether the said documents fell within the meaning of the expression "books" and whether depreciation was, therefore, admissible thereon. The Tribunal, however, held that the agreements showed that some of the services which the foreign collaborator was required to render to the assessee were on revenue account (as, for example, the provision which required the foreign collaborator to depute their experts to correct any flaws or irregularities that might be encountered in the course of the production) and that, therefore, the payment of Rs. 1,60,000 was partly on capital account and partly on revenue account. As the appeal was by the Department and not by the assessee and the Department could not be in a worse position than what it was when it came up in appeal, the Tribunal held that even if it were to hold that the part of the payment was allowable as revenue expenditure, the allowance could not exceed Rs. 12,000, being the deduction allowed by the Appellate Assistant Commissioner. In other words, the Tribunal confirmed the deduction of Rs. 12,000 not as depreciation allowance but as revenue expenditure and, in this manner, it confirmed the order of the Appellate Assistant Commissioner.

Both the assessee and the revenue sought a reference to the High Court. In the reference applications preferred by each before the Tribunal, the assessee urged a two-fold contention: (a) that the assessee was entitled to claim depreciation at the rate applicable to library (books) on the entire sum of Rs. 1,60,000 paid to the foreign collaborator; and (b) that the Tribunal ought to have given a specific finding as to what would be the amount representing the capital expenditure which was entitled to depreciation and the assessee sought to raise appropriate questions covering these contentions.

On the other hand, the revenue urged two contentions : (i) that having come to the conclusion that the payment of Rs. 1,60,000 did not bring into existence any depreciable asset, the Tribunal ought to have allowed its appeal fully and no relief could be granted to the assessee; and (ii) that the Tribunal was justified in allowing the sum of Rs. 12,000 as revenue expenditure while disposing of its appeal particularly when no point was urged before it that the same was an item of revenue expenditure and sought to raise proper questions covering these contentions.

(ii) The Tribunal, however, behalf of assessee, referred the following question for the opinion of the Hon'ble High Court :-

"Whether, on the facts and in the circumstances of the case, and on a true interpretation of the collaboration agreements between the assessee and M/s. Metrimpex Hungarian Trading Company, Budapest, the payment of Rs. 1,60,000 was attributable partly to the acquisition of depreciable asset and partly to revenue expenditure or wholly towards the acquisition of a depreciable asset ?"

(iii) The Hon'ble High Court, after considering the facts and circumstances of the case, took the view that the payment of Rs. 1,60,000 did not mainly represent the purchase price of the designs, drawings, charts, etc., as contended by the assessee, that the rendering of "documentation service" was incidental, and that no part of the expenditure was on revenue account but the whole of it was of a capital nature bringing into existence an asset of enduring benefit to the assessee, but what was brought into existence was a non-depreciable asset and, therefore, the assessee was not entitled to any relief in the case. In other words, by its judgment dated 7-1-1973, the High Court held that the assessee was not entitled to any relief either by way of depreciation allowance or on account of revenue expenditure.

(iv) Following the aforesaid decision rendered by the Hon'ble High Court in assessment year 1996-97, the assessee was denied similar relief in subsequent in two assessment years 1968-69 and 1969-70. The appeal before the Hon'ble Supreme Court was against the order of the High Court for assessment years 1968-69 and 1969-70.

25.1 The common question of law referred for the determination of the Hon'ble Supreme Court read as under:-

"Whether, on the facts and in the circumstances of the case and on true interpretation of the collaboration agreements between the assessee and M/s. Metrimpex Hungarian Trading Company, Budapest, the payment of Rs. 1,60,000 by the assessee to the foreign collaborator was attributable partly or wholly towards the acquisition of a depreciable asset ?"

25.2 It was, in view of above facts and circumstances of the case, the Hon'ble Supreme Court accepted the assessee's claim by holding following proposition of law :-

"(i) that, reading clauses 3 and 6(a) together, it was clear that rendition of documentation service was really the main service to be rendered by the foreign collaborator.

(ii) that the various documents such as drawings, designs, charts, plans, processing data and other literature included in documentation service, the supply whereof was undertaken by the foreign collaborator, more or less formed the tools by using which the business of manufacturing the instruments was to be done by the appellant and for acquiring such technical know-how through these documents, a lump sum payment was made. This expenditure was incurred by the appellant as and by way of purchase price of the drawings, designs, charts, plans, processing data and other literature, etc., comprised in "documentation service" and was of a capital nature as a result whereof a capital asset of technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature was acquired by the appellant.

(iii) That "plant" was not necessarily confined to an apparatus which was used for mechanical operations or process or was employed in mechanical or industrial business. But in order to quality as "plant", the particular article had to have some degree of durability. The test to be applied was : Did the article fulfil the function of a plant in the assessee's trading activity? Was it a tool of his trade with which he carried on his business? If the answer was in the affirmative, it would be a "plant".

(iv) That the drawings, designs, charts, plans, processing data and other literature comprised in the "documentation service" as specified in clause 3 constituted a "book" and fell within the definition of "plant" in section 43(3) of the Income-tax Act, 1961. The purpose of rendering such documentation service by supplying these documents to the appellant was to enable it to undertake its trading activity of manufacturing the odolites and microscopes and these documents had a vital function to perform in the manufacture of these instruments; in fact, it was with the aid of these complete and up-to-date set of documents that the appellant was able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. That by themselves these documents did not perform any mechanical operations or processes did not militate against their being a plant since they were in a sense the basic tools of the assessee's trade having a fairly enduring utility, though owing to technological advances they might or would in course of time become obsolete. The capital asset acquired by the appellant, viz., the technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature, fell within the definition of "plant" and was, therefore, a depreciable asset."

26. After careful consideration of aforesaid decision of Hon'ble Supreme Court, what we are able to understand is that-

(i) any expenditure incurred for procuring technical know-how which may be consisting of drawings, designs, charts, plans, processing data and other literature including in documentary, etc. procured for the purpose of using as tool in assessee's business is of capital nature; meaning thereby that any expenditure incurred for procurement of technical know-how is of capital nature.

(ii) to determine as to what constitute "plant" test to be applied is; did the article fulfil the function of a plant in the assessee's trade activity? Is it a tool of its trade which is carried? If the answer in the affirmative, it would be a plant because plant is not necessarily confined to a optus which is used for mechanical operation or process or is employed in medical or natural business.

(iii) that the drawings, designs, charts, plans, processing data and other literature comprised in the documental service or a book or technical know-how falls within the definition of a "plant".

(iv) that such "plant" is depreciable, i.e. entitled to depreciation as available on Plant for the type of business in which such know-how is utilized.

27. After having considered all the facts and circumstances of the case, we, respectfully following the aforesaid decision of Hon'ble Supreme Court, are of the opinion

(i) that the expenditure incurred by the assessee in procuring the technical know-how was of a capital nature.

(ii) that the capital asset acquired by the assessee in the form of technical know-how was, definitely, covered with the definition of 'Plant' and

(iii) that such 'Plant' was of depreciable nature, i.e. entitled to depreciation as per rules.

28. Having held as above, we are of the opinion that the assessee is not entitled the deduction of whole of the expenditure incurred for procuring 'technical know-how', though that the same was used for meeting its business contractual obligation by supplying the same to Gujarat Maritime Board also, however, a question arises as to whether the technical know-how being a capital assets (Plant), the assessee can be granted any depreciation or not.

29. So far as provisions of section 32 of the Act are concerned, its clear that the tangible assets have been made entitled to depreciation only with effect from 1-4-1999 and if strict interpretation of these provisions is considered, the assessee may not be entitled to depreciation also, but for the decisions in the case of Scientific Engineering House (P.) Ltd. (supra) wherein the Hon'ble Supreme Court has specifically held the technical know-how to be plant and of depreciable nature, we are of the opinion that the assessee is entitled to depreciation at the rate applicable to Plant and Machinery for such type of business.

30. Without prejudice to the above, we are of the opinion that such a strict interpretation of these provisions should not be taken for the reasons as explained below:-

(i) If the taxing organ of a Democratic Government is analyzed, and that too keeping in view the Constitution of India, wherein the very permeable itself speaks of "Government - for the people, by the people, and of the people", one will come to the only one conclusion that the Government though, of course, can collect the taxes, but at the same time, is supposed to be vigilant with respect to welfare measure's for the people of the Country. It is in the light of this concept, we have a question to ask ourselves and the question is can a citizen be deprived of well-established business concepts, invoking of which may have been necessary in view of the commercial expediency, only because the Government missed to recognize such concept at an early stage. Our answer to this question is, definitely, a "NO", because arranging one's business affairs in accordance with the lawful commercial prevailing and accepted concepts cannot be used against the interest of the business only because Democratic Government failed to recognize the concepts in time. Such an action on the part of the businessman has to be held to be in accordance with the intention of the makers of the Constitution and, consequently, in accordance with the intention of the Legislature, though expressed at a later date.

In our opinion, late recognition of the need of the public, by the Government, cannot be a hindrance to deprive the persons, who have already waken up and have carried on the activities in accordance with commercial concepts - later recognized by the Government, of the benefits available under such later recognized concepts. On the contrary, it should be held that it were those persons, who even at the risk of their own cases wanted to follow the concepts which ultimately made the Government to awake, i.e., to feel the necessity of the recognising of the concepts; and if that is the case, then there is no reason as to why the persons pursuing the concepts should be deprived of the benefits of such prevailing concept, though brought on statute as a result of recognition of the same at a later date, but having been upheld by the highest Court of the Land.

(ii) It is, in view of above facts and circumstances - specially the fact that Hon'ble Supreme Court has recognized this concept of admissibility of depreciation on such assets, by holding that such assets are of depreciable nature, we are of the opinion that amendment made in section 32 of the Act for granting depreciation on intangible asset can be extended for grant of depreciation in years prior to coming of this amendment on the statute. It is, therefore, on this account also that we are of the opinion that the assessee is entitled to depreciation on the cost of know- how procured by it and used for fulfilling its business contractual obligation for development of Ports of Gujarat Maritime Board.

31. So far as any other direct expenditure incurred by the assessee in meeting this obligation are concerned, we are of the opinion that the assessee is entitled to that expenditure subject to restriction as per provisions of income-tax, if any.

32. To conclude, we direct the Assessing Officer to allow the assessee following expenses:

(i) Any expenditure directly incurred for meeting its business contractual obligation during the course of providing technical know-how for the development of Ports of Gujarat Maritime Board.

(ii) Any expenditure incurred for acquiring know-how which was procured solely for meeting assessee's business contractual obligation for development of Gujarat Maritime Board's Port and not for the purpose of assessee's own use in these years or in subsequent years.

(iii) Allow depreciation on the capitalized value relatable to know-how used for meeting its business contractual obligation towards Gujarat Maritime Board, i.e., on the expenditure incurred for acquiring know-how, which, even after having been used for development Gujarat Maritime Board's Port, is available to be used for development of assessee's own Port also, at the rate applicable to the Plant and Machinery.

33. In the result, both the appeals of the revenue are allowed in part.

Per Sanjay Arora, Accountant Member. - I have carefully gone through the order of my ld. brother. However, I find myself in respectful disagreement with the view taken by him and, therefore, proceed to write a separate and dissenting order.

2. The facts of the circumstances of the case, the arguments advanced before each of the authorities below, as well as their decisions, stand enumerated by my ld. brother in his detailed order in sufficient detail and, therefore, I take the same as given, and shall draw on the same as and when called for, for the purpose of my order.

3. The issue is the taxability of the contracted receipt of Rs. 55.06 lakhs and Rs. 69.27 lakhs for the two consecutive years, being the assessment years (A.Ys.) under appeal, by the assessee-company from the contractee M/s. Gujarat Maritime Board ('GMB'), a Government of Gujarat Undertaking, engaged in the business of development and setting-up of ports across the State of Gujarat. A part of the consideration to it also flows one M/s. Eastern Generation Limited ('EGL'), though the amount thereof is not specified separately, and it is presumed in the ensuing discussion that its nature is not different from of that from GMB.

4. The contention of the receipt being only a reimbursement of expenditure incurred (and therefore without any income component) stands rejected by all the authorities, including my ld. brother, and to which decision I am in full agreement. The said proposition, I may further add, is itself inconsistent with company's statement of being already in possession of the relevant information/know-how as the reason for the GMB (and I presume, EGL), requiring it for their purposes, asking it to deliver the same, of course, at a cost. In other words, no separate expenditure stands incurred in providing the contracted services (variously termed as technical services, consultancy fees, technical know-how, etc.), being already in its possession, so as stipulate for the provision of reimbursement of expenses, or at cost to cost basis (for which rendering of accounts - to justify costs - also becomes incumbent). The argument, thus, goes against the grain of the whole premise of the transaction. No doubt, some fresh/incidental cost may have to be incurred for the purpose, i.e., of the delivery of the services, or for effecting such modification (to the source data/information, etc.), as may be warranted as per the specific requirement(s) of the assignment/contract. But for that, i.e., to be construed as such, again, two things become essential :

(a) identification of such fresh costs/expenses, required to be incurred;

(b) basis of their measurement, e.g. an Engineer's visit to the site would have to be at an agreed cost covering his cost to his parent company, et. al.

5. and, further, agreed apriori, to be met on a statement being provided, separately, i.e., distinct from the balance contractual consideration. In the facts of the case, I do not find such essential elements present to pursue this proposition any further.

5.1 The second argument advanced by the assessee-company is that the receipt, as a revenue one, would require, to determine its taxable component, set-off of the expenditure incurred, and which, in the peculiar facts and circumstances, amounts to much more than the receipt itself, so that no income ensures. I wish to examine this proposition in greater detail with reference to the facts and circumstances of the case, being the only argument advanced before us.

5.2 The aforesaid proposition is perfectly valid insofar as the expenditure specifically required to be incurred (for the purpose of the execution of the project is concerned), as also discussed at para 4 above. However, to extend this argument to the whole of the expenditure incurred, which continues to be expended by the assessee up to at least the end of the second year (so as to validate the proposition) is, again, only missing the point. The arrangement entered into is certainly not one for cost sharing; there being no privity of contract between the international agencies hired by the assessee-company and the GMB (and EGL). As such, what is the basis for charging the GMB by the assessee for both, i.e., in respect of :

(a) new/additional costs;

(b) information already in the know of the company;

is not clear, to enable giving effect to the proposition insofar as the expenditure at (a) above is concerned. It would also be relevant to note that if the charge is not bifurcated as above, but is a consolidated charge, as it appears to be, even the expenses mentioned at (a) above would not be possible to be reduced (from the receipt) unless the same get/are properly identified.

5.3 Moving forward, and assuming for the moment identification of such additional cost(s) as stand incurred specifically in the execution of the contract, and which would therefore merit reduction [from the receipt(s)], leaves us with the cost(s) that stand already incurred by the assessee for the execution of the own project, i.e., development of port at Mundra licenced to it by GMB. At this point it becomes necessary to dilate on the nature of the services provided by the assessee-company to the GMB (and EGL). The same stand referred to by it variously, as also mentioned earlier, as consultancy charges, technical service fees, know-how, et. al., shrouding, however, in these terms, the exact nature and scope of the services, so that one can only try to decipher what that may mean. At least at two places it is stated to be a project report, (i.e., in the agreement with GMB, and the TDS certificates issued by it to the assessee-company, though it may include something beyond that considering that the total charges for the two years aggregate to Rs. 124.33 lakhs. That, however, cannot remain in the realm of speculation, and would need to be specified in no uncertain terms, if not actually examined. Nevertheless, one thing that is sure is, if not wholly, it is also towards a project report, containing the technical details for the development and construction of port at Mundra, and which required collection, tabulation, collation of data/information, apart from the technical skills required to do so, and which the company had procured for its own purposes, i.e., development of the Adani port (at Mundra) at considerable cost thro' engaging the services of, inter alia, international agencies. and which likewise, i.e., but for the Agreement (with the assessee-company), would also be required (to be engaged) by GMB, again, at similar costs. As such, entering into a subsidiary arrangement as the present one with the assessee company made sound commercial/economic sense for both; cutting time and costs for the GMB, and providing revenue to the assessee, and which undoubtedly, speaking in broad and commercial terms, reduces its own development cost to that extent.

5.4 Now, the question that survives for adjudication is whether such reduction of/in costs can indeed be said to have taken place, or, though spoken of such loosely, i.e., in common parlance, arising as it does out of a separate and independent contract, can be netted from the capital cost. To my mind the answer would lie, quite simply, in the nature of the receipt. If it is revenue in nature, it cannot, by any stretch of imagination, go to reduce the assessee's capital cost, and if not so, it definitely would. The receipt is clearly on revenue account even as tacitly admitted by the assessee itself when it speaks of being allowed expenses thereagainst, or of only a net income reckoned @ 8 per cent of the gross receipt, etc., i.e., by way of alternate pleas.

5.5 That being so, at the same time, the receipt from GMB cannot be said to be without corresponding cost to the company. Towards this end, the company in its written submissions states, by way of an example, of setting-up of a boiler by a textile unit, which though cannot be used by its own undertaking, being under implementation, is so done by another, yielding revenue. The same would definitely require adjustment of cost of operation of the boiler plant, to determine the income embedded in the gross receipt charged to the customer. Principle-wise there can hardly be any doubt about it being the correct proposition of law, and rather, only reinforces the claim/argument in respect of specific or additional cost (as stated in para 5.2) and on which there is hardly any doubt. However, the question presently under discussion, phrasing it in terms of the said example is the appropriation of, or in respect of, the capital cost of the boiler, being used in the provision of services rendered or charged. But, before we do that, it would have to be seen how this example fits into the facts of present case, i.e., if it is in fact a valid example. As stated, the company having already incurred huge costs in gathering the (relevant) information, it became much more feasible for GMB to deal with the assessee-company. The question is how is the bill raised, or rather, required to be raised, i.e., under the contract between the two. The preparation of the project report cannot possibly take two years, i.e., the period over which the charges are spread, suggesting either additional services, or large scale amendments to the one which the one the company had procured for itself. Either way, in principle, it boils down to incurring of specific costs, and/or charge against costs already borne; even as the example of boiler (being only used as such) becomes inappropriate/invalid. The accounts as presented by the company in this respect, which are trumped up by the ld. CIT(A) in his order, as also emphasized by the ld. AR before us, do not inspire much confidence as the basis of charging would have only to be/been fixed before-hand, i.e., at the time the contract is entered, while the costs would only be incurred subsequently, and given the dynamics of the business situations, cannot be predicated/predetermined, except only in broad terms. The accounts as prepared, match the two, i.e., the charges and the costs, suggesting only an allocation of costs to the extent of the charges raised, basis of which is, again, not spelt out. Another important aspect to this is that the company having engaged the services of the consultants for its own project, it would require another agreement with them if their services were also to be utilized for a separate assignment, which is what, as it transpires, it is, considering the aforesaid period of two years. Again, the costs and the revenue stream would be required to separately identified, in accordance with the matching principle, to ascertain the profit from the sub-contract.

5.6 Next, I presume, for the sake of discussion, of (to howsoever extent) a part of the costs already incurred, or to state more appropriately, the body of knowledge/information/data, etc. generated/sourced by incurring the cost(s) already incurred, to have been (also) utilized as such for the contract with GMB (and EGL). Even for this to take effect, I do not think, could be possible without the pro-active and interactive support of the said international agencies through their personnel. As firstly, in reality, the delivery of the services, being on a technical side, are as a one composite whole, i.e., as per the requirements of the contract/assignment, and not by breaking it down into different components based on what part of it is already available, and what would need to be generated throw add-on(s) to what is available, and thirdly, what may be required to be sourced afresh. In other words, such a segmentation is artificial, and removed from reality, serving only the purpose of understanding the tax implications, or if one may venture to add, to fit the same into some pre-determined, easy-to-recognize, income, and thus, tax model.

5.7 As such, even if the consultancy contract were to contain each of the three components as aforesaid, which would likely be the case, as generally obtains in regular business settings, i.e., when a new contract/arrangement is entered into (some component/module being already available, some requiring modification, and some fresh undertaking), it becomes, the extent and scope of the three being different, a new assignment, with its own cost and resource imperatives. Even keeping the discussion on a general plane, the un-tenability of the assessee's statement on facts comes through - the contract with GMB requires performance of varied jobs, entailing a set of costs, so that it cannot have any direct nexus with the on-going development of port by the assessee-company; each project being distinct with its own job profile.

5.8 Expanding further, for the sake of clarity, to a more specific level, we find that the assessee-company states in respect of the services provided to have prepared the Project Report (PR) for GMB. Clearly, the said report is not a general Feasibility Report (FR), which examines the desirability or otherwise of setting-up the project from technical and economic angles. The cost and time scale involved in its preparation impel this statement, and is subject to being controverted. However, even such a preliminary report would require a separate study, entailing incurring of separate costs. Project Reports, starting with the FR, could be drawn to increasingly higher level of details, covering technology selection, basic engineering, detailed engineering, etc. Whatever the extent and scope of the PR contracted to the assessee-company, the same would require considerable inputs in terms of resources. In fact, given the peculiarities of each area/site, and the operational parameters, viz., design, specialized commodity/material handling at the proposed jetty, etc., each project becomes unique in itself. Further, the contract could envisage provision of services such as vendor (contractor) selection (for work execution), supervisory support, et.al. In short, it is essential to delineate the scope of the services required to be provided and determine the related costs.

A separate cost centre-wise accounting would thus have to be in place, as most of them may involve allocation of common resources, also being used, simultaneously, for the assessee's own development project. The assessee-company has only followed the method of netting of the receipts, which correspond to the work carried out in pursuance to the contract, extending to at least two years, for which the aggregate receipt is Rs. 124.33 lakhs. The contract is not one for development of port for GMB (and EGL) on turn-key basis. As such, I am disinclined to ascribe any reasonableness to the following of the said method of accounting; the two projects being separate and independent.

5.9 In view of the foregoing, in my opinion, the facts as stated/brought in record, make out for a strong case for restoration of the matter back to the file of the Assessing Officer for determination, at the assessee's instance, the costs, w.r.t. to the basic accounting data/processes, relatable to the work carried out in pursuance of the GMB (and EGL) contract, and thereby, to determine, on the matching principle, the profit, if any, earned by the company on the same, as would be done following any recognized method under contract accounting. This might involve allocation of certain costs, e.g. time cost of the company's engineers (say). The same, if established on the basis of proven record, can only be w.r.t. the cost thereof to the company. Also, it would be essential to understand the basis of raising of the charges on the contractee under the contract for the various services/elements of the contract. The company, following the mercantile method of accounting, its operating statement shall have to be drawn w.r.t. the work completed, whether billed or not, and whether the amount in its respect received or not.

5.10 My disagreement, including the reasons therefor, in view of the foregoing, with the decision of my ld. brother, thus, are apparent. However, as the matter would need to travel to a third member for resolution, I may dwell on this aspect of the matter in more detail :

(a) the nature and scope of the services rendered, or contractually required to be so done, is not clear, in spite of the same being the center-piece of the controversy; any reference to the services contracted to EGL (by the assessee) is conspicuous by its absence. Also, it being referred variously at different places is confusing and misleading, and gives an impression that it is so done only to fit its case to the requirements of the particular argument being advanced, some of which clearly clothe it with a revenue character, as against of a capital receipt as claimed by it in its accounts as well as the return(s) of income. Further, the fact that the revenue has not highlighted this issue (in this manner) is not very material; it being basic to not only the character of the receipt on which, as aforesaid, we find no serious dispute, but also its taxable quantum, and the Tribunal being fully competent to do so.

(b) the finding as to the cost incurred by the assessee as constituting a technical know-how (with it) is contrary/inconsistent with the facts/material on record, as I have taken pains to bring forth in the earlier part of my order. In fact, it is contrary to what the assessee itself says of it. While it may be, and which appears to be the case, that the services availed by the assessee from various persons (in its employment, or on hired basis), whose services it has availed for its own project execution, i.e., development of (Adani) port at Mundra, are in the nature of included services, i.e., include the provision of services requiring the user of customary skills of their calling for the purpose, besides making available (by the hired agencies) the technology (experience, skill, know-how, or processes, or development and transfer of a technical plan or design) to the assessee, that by it to the contractee(s) is not. The whole premise of allowing depreciation on the capital cost of its own project by treating it as a technical know-how is highly presumptuous. The assessee may in the course of its own project execution, be transferred knowledge/plan/design, etc., which may be considered as a technical know-how. But it is only that cost (which remains undetermined), and to the extent it is of a nature that could be used independent of its location or other variable parameter in relation to the development of a port (viz., design, commodity handling system, etc., as the different sea currents or the proposed material to be handled, etc., may warrant a totally different design specification) that can be considered as a technical know-how, as it is only this that can be applied for designing/planning/setting-up any other port project. To put it in terms of the assessee's example (refer para 5.5), the question is whether it shall be allowed depreciation on the use of boiler on the cost of the whole of the textile unit? The answer can only be in the negative. Secondly, it remains to be seen, paraphrasing, again, the question in the context of the said example, is whether the assessee has provided steam (by use of the boiler), or enabled the contractee(s) to set-up a boiler? The nature of the activities/services required for the two are clearly different. With respect to the claim of depreciation, while the provision of steam would, arising only on the direct user of the boiler, entitle the same, providing services to set-up a similar (or dissimilar) boiler can, again, only be in the negative, though it may entitle it on some other capital asset (acquired in the setting-up of the textile unit). and, which gives rise to the third question, i.e., why, the contractee's project being of the same genre, would not similarly require the acquisition of the technical know-how, the essence of its transfer being that it enables the acquirer to apply the same? Translated, for better assimilation, to an analogous question relatable to the assessee's example; why would not the contractee require the boiler [i.e., the same capital asset(s) on which the depreciation is being claimed], its project (textile unit) being similar to that of the assessee, but only steam ? Needless to add, the user of such a right, being an exclusive/protective right, would necessarily require a consent from the person(s) from whom the same stands acquired, or a tripatriate arrangement between the three, i.e., the grantor, the assessee (contractor) and GMB/EGL (contractee), and of which there is no evidence (and/or claim). (also refer paras 5.5 and 5.6).

(c) Finally, my ld. Brother has emphasized, on the basis of the decision of the Hon'ble Apex Court in the case of Scientific Engineering House (P.) Ltd. (supra) that the technical know-how is a capital asset subject to depreciation, so that depreciation under section 32 of the Act is allowable, even as the same is not recognized as a capital asset exigible to depreciation under the Act. In this regard, I would only wish to say that there cannot be, i.e., in principle, any difference of opinion in the matter; the law with regard thereto being settled by the Apex Court. However, the same to be given effect to, would require, apriori, a factual determination of the matter, and which I find to be absent. It is neither the assessee's case/claim, nor supported by any factual finding in its respect, nor possibly can be, i.e., given the highly tenuous/uncertain state of the factual edifice. As such, I do not think that such a direction would be consistent with the facts of the case.

5.11 The assessee-company has adopted different stands in the matter (of the exact nature of the services rendered), each at variance, if not in conflict, with the others, viz., capital receipt; reimbursement of cost; supply of technical know-how; consultancy (technical services) (using know-how); preparation of project report, et. al. and, further, has conceded to the receipt(s) being of a revenue nature, unequivocally that is, for the first time before the Tribunal, i.e., after the acceptance of its claim by the learned CIT(A) of the impugned receipt(s) being of capital nature, so that the same would only go to reduce the capital cost of the project being set-up by it. In this view of the matter, the factual determination of the same being inadequate, and the allowance of the various expenses/allowances that may be a permissible deduction thereagainst, having not been examined by the Assessing Officer, the matter, in my opinion, would only need to travel back to his file for a de novo adjudication in its respect, i.e., of the assessment of the taxable income arising to the assessee-company out of the performance of its contract(s) with GMB and EGL, for the years under reference. The assessee shall, needless to add, be afforded proper opportunity to establish its case. I decide accordingly.

Reference under section 255(4) of the Act

As there is a difference of opinion, the matter is being referred to the President, Income-tax Appellate Tribunal, with a request that following question may be referred to a Third Member or pass such order as the President may deem fit.

"Whether on the facts and circumstances of the case, the Tribunal would be justified in giving the directions to allow specific expenditure/allowance or the assessment requires setting aside for making de novo assessment ?"

Third Member Order

Per R.P. Garg, Vice President. - A difference of opinion has arisen between the Members over appeals by the Revenue and therefore a reference was made to the Third Member, on the following point:-

"Whether on the facts and circumstances of the case, the Tribunal would be justified in giving the directions to allow specific expenditure/allowance or the assessment requires setting aside for making de novo assessment ?"

2. In the years under consideration, the assessee was in the process of setting up a Port at Mundra in Kutch District of Gujarat. It has receipts from interest and contract receipts and technical fee received from Gujarat Maritime Board and also from Eastern Generation Limited. It did not declare any income to tax on the plea that its Port project was under implementation and it had not started any commercial activity.

3. The Assessing Officer, however, held both interest and contract receipts of technical fees are income liable to tax under the head "Income from other sources". He did not allow any expenditure against these receipts as the expenses were capital expenditure pertaining to project under implementation and not for earning these receipts/income. He also held that decision of the Supreme Court in the case of Bokaro Steel Ltd. (supra) for adjusting income against expenditure was not applicable, nor did he find the fact as relevant that it was a reimbursement of expenses incurred by the assessee as it was required by Gujarat Maritime Board to supply the technical know-how which is required for development of Mundra Port. He held that technical know-how was obtained from foreign agencies and was of a superior quality. Gujarat Maritime Board and Eastern Generation Ltd. were interested in having the benefit of such information, technical know-how and such consultancy for their project of development of ports in Gujarat. He also noticed that TDS was deducted by the payees on payment of such money to the assessee. He, therefore, held that the receipt was not a part of setting up of assessee's Port but independent source and consequentially liable to tax as income from other sources.

4. On appeal by the assessee, the CIT(A) held the contract receipts were never part of the Profit and Loss Account and therefore no reason to presume that assessee had earned any income by way of consultancy fees; that the receipts were for project of Mundra Port, which the assessee had planned out to establish as a port and for this purpose, the assessee was studying various factors through international agencies and incurred huge expenditure and thus had detailed analysis and report on the subject; that fee was for technical know-how which was obtained by the assessee by incurring huge expenses and was, in fact, recovery of such expenditure. He held that the receipts would either reduce the cost of the assessee or the expenditure would be allowable against receipts as there was a direct relation thereof to receipts. He also held that entire project was in the ownership of Gujarat Maritime Board and there was no reason to consider the receipts as income. He further observed that it was a case of sharing of expenditure and that the decision of Bokaro Steel Ltd. (supra) was applicable for reduction of cost of assessee by these receipts.

5. Revenue has come in appeal. Both the Judicial Member and the Accountant Member agreed that contract receipt was revenue in nature and not receipts by way of or in the nature of reimbursement of expenditure. There is, however, a difference of opinion on allowability of expenditure between two Members. The Judicial Member says that the assessee had incurred the expenditure on acquiring know-how which was of capital in nature; that know-how is a plant; that such know-how was used for assessee's business as well as for the project of Gujarat Maritime Board the assessee would be entitled to depreciation on cost incurred for acquiring the same. He concluded and directed the Assessing Officer to allow the assessee (i) the expenditure directly incurred for meeting its business contractual obligation during the course of providing technical know-how for the development of Ports of Gujarat Maritime Board, (ii) the expenditure incurred for acquiring know-how which was procured solely for meeting assessee's business contractual obligation for development of Gujarat Maritime Board's Port and not for the purpose of assessee's own use in these years or in subsequent years, and (iii) allow depreciation on the capitalized value relatable to know-how used for meeting its business contractual obligation towards Gujarat Maritime Board, i.e., on the expenditure incurred for acquiring know-how, which, even after having been used for development of Gujarat Maritime Board's Port, is available to be used for development of assessee's own Port also at the rate applicable to the Plant and Machinery.

6. The Accountant Member, on the other hand, held expenditure, of course, as relating to earning income would be allowable but no exercise was done by any authority at any stage the matter in his opinion required to be set aside to Assessing Officer to determine the allowability. In his view, however, the depreciation may not be wholly allowable as the know-how is not only used for contract receipts but also used for development of its own project which is in implementing stage. His disagreement is elaborated to be because - (a) the nature and scope of the services rendered, or contractually required to be so done, is not clear, in spite of the same being the centre-piece of the controversy; any reference to the services contracted to Eastern Generation Limited is conspicuous by its absence. Also, it being referred variously at different places is confusing and misleading, and gives an impression that it is so done only to fit its case to the requirements of the particular argument being advanced, some of which clearly clothe it with a revenue character, as against of a capital receipt as claimed by it in its accounts as well as the return(s) of income. Further, the fact that the revenue has not highlighted this issue is not very material; it being basic to not only the character of the receipt on which, as aforesaid, we find no serious dispute, but also its taxable quantum, and the Tribunal being fully competent to do so; (b) the finding as to the cost incurred by the assessee as constituting a technical know-how is contrary/inconstant with the facts/material on record. In fact, it is contrary to what the assessee itself says of it. While it may be, and which appears to be the case, that the services availed by the assessee from various persons, whose services it has availed for its own project execution, i.e., development of port at Mundra, are in the nature of included services, i.e., include the provision of services requiring the user of customary skills of their calling for the purpose, besides making available the technology to the assessee, that by it to the contractee(s), is not. The whole premise of allowing depreciation on the capital cost of its own project by treating it as a technical know-how is highly presumptuous. The assessee may in the course of its own project execution, be transferred knowledge/plan/design, etc., which may be considered as a technical know-how. But it is only that cost, and to the extent it is of a nature that could be used independent of its location or other variable parameter in relation to the development of a port that can be considered as a technical know-how, as it is only this that can be applied for designing/planning/setting-up any other port project. Needless to add, the user of such a right, being an exclusive/protective right, would necessarily require a consent from the person(s) from whom the same stands acquired, or a tripatriate arrangement between the three, i.e., the grantor, the assessee and Gujarat Maritime Board/Eastern Generation Limited, and of which there is no evidence (and/or claim); and (c) the decision in Scientific Engineering House (P.) Ltd. (supra), to be given effect to, according to him, would require, apriori, a factual determination of the matter and supported by any factual finding in its respect and possibly can not be given in the highly tenuous/uncertain state of the factual edifice and therefore such a direction would not be consistent with the facts of the case.

7. The parties are heard. On a close reading of the proposed orders, I do not really find any difference between the two Members on the principle of allowing expenditure including depreciation. The Judicial Member has given specific direction to allow depreciation, if used for consultancy as well own project, in addition to full cost, if exclusively used for Gujarat Maritime Board and the other related expenditure. Each of these allowances by the Judicial Member also require verification and determination by the Assessing Officer. The Accountant Member instead of being specific, had opined for setting aside the assessment for de novo determination by Assessing Officer without specifying the item of expenditure. Assessing Officer has to determine the expenditure allowable including depreciation and cost of know-how exclusively used and transferred to Gujarat Maritime Board and/or Eastern Generation Limited. In my opinion, therefore, the matter is to be set aside with a direction to the Assessing Officer for determination afresh the allowable expenditure including specific expenditure narrated by Judicial Member and subject to the rider put up by the Accountant Member as to the allowability of depreciation i.e., only that part of know-how which was used in imparting consultancy to Gujarat Maritime Board and Eastern Generation Limited. In my opinion, it is not necessary to set aside the assessment as a whole for de novo assessment as held by the Accountant Member.

8. The appeals are to be partly allowed for statistical purposes.

Order

Per I.S. Verma, Judicial Member. - As a result of difference of opinion between the Members constituting Division Bench, the following question was got referred to the Hon'ble President ITAT for the decision of Hon'ble Third Member :

"Whether on the facts and circumstances of the case, the Tribunal would be justified in giving the directions to allow specific expenditure/allowance or the assessment requires setting aside for making de novo assessment."

2. The Hon'ble Vice-President in the capacity of Third Member has now decided the question referred to him as per his findings contained in paragraph No. 7 of order dated 10-4-2007, which reads as under:-

"7. The parties are heard. On a close reading of the proposed orders, I do not really find any difference between the two Members on the principle of allowing expenditure including depreciation. The Judicial Member has given specific direction to allow depreciation, if used for consultancy as well own project, in addition to full cost, if exclusively used for Gujarat Maritime Board and the other related expenditure. Each of these allowances by the Judicial Member also require verification and determination by the Assessing Officer. The Accountant Member instead of being specific, had opined for setting aside the assessment for de novo determination by Assessing Officer without specifying the item of expenditure. Assessing Officer has to determine the expenditure allowable including depreciation and cost of know-how exclusively used and transferred to Gujarat Maritime Board and/or Eastern Generation Limited. In my opinion, therefore, the matter is to be set aside with a direction to the Assessing Officer for determination afresh the allowable expenditure including specific expenditure narrated by Judicial Member and subject to the rider put up by the Accountant Member as to the allowability of depreciation i.e. only that part of know-how which was used in imparting consultancy to Gujarat Maritime Board and Eastern Generation Limited. In my opinion, it is not necessary to set aside the assessment as a whole for de novo assessment as held by the Accountant Member."

3. Since the Hon'ble Vice-President has agreed with the directions given by the Judicial Member, subject however to the observations contained in paragraph No. 7 of order dated 10-4-2007 (supra), both the appeals are disposed of as per observation/directions of the Hon'ble Third Member (supra). Consequently, the Assessing Officer is directed to decide the assessee's claim afresh majority decision including the directions contained in paragraph No. 7 of the order (supra) of the Hon'ble Vice-President.

4. In the result, both the appeals of the Revenue are treated as partly allowed for statistical purposes.

 
 
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