N.V. VASUDEVAN, J.M. ITA No. 3093/Del/2000 & ITA No. 2906/Del/2000 : ITA 3093/Del/2000 is appeal by assessee, while ITA 2906/Del/2000 is appeal by Revenue and both these appeals are directed against order dt. 31st March, 2000, of CIT(A)-VII, New Delhi, relating to asst. yr. 1996- 97. 2. We shall first take up for consideration appeal by assessee, viz., ITA 3093/Del/2000. first ground of appeal reads as follows : 1. That CIT(A), erred on facts and in law in confirming disallowance of expenditure on installation charges and management fee paid to HDFC in respect of assets taken on lease holding same to be capital expenditure. 1.1 That CIT(A); erred on facts and in law in holding that assets were taken on lease on permanent basis resulting in enduring benefit to assessee. This ground of appeal can conveniently be decided together with ground No. 3 of grounds of appeal of Revenue in ITA 2906/Del/2000, which reads as follows : 3. That on facts and in circumstances of case, learned CIT(A) has erred in deleting disallowance of interest claimed as to leased assets which is capital expenditure in nature. 3 . facts and circumstances under which aforesaid grounds of appeal arise are as follows. assessee is company, which is engaged in business of manufacture of motor-cycles and its accessories. assessee h d incurred expenditure of Rs. 81,42,285 during previous year. details of these expenditure were as follows : Interest on leased assets Rs. 51,73,540 Civil work on leased assets Rs. 19,68,745 Management fee paid to HDFC Rs. 10,00,000 Rs. 81,42,285 assessee entered into lease agreement dt. 11th March, 1986, with M/s HDFC whereby assessee took certain items of plant and machinery on lease. Copy of lease deed is placed at pp. 96 to 118 of assessee's paper book. sum of Rs. 10 lakhs was payable to HDFC as management fee for arranging lease transaction. payment of Rs. 10 lakhs as management fee to HDFC is one of items of expenditure listed above. Similarly, certain items of machinery were also taken on lease from M/s Hero Honda Fin Lease Ltd. sum of Rs. 51,73,540 was paid as interest on leased assets. One of terms of agreement in both lease agreements is clause to effect that in event of manufacturer of plant and machinery demanding any advance for supply of machinery, finance company will pay same and notwithstanding fact that lease of machine will commence only in future, lessee (viz., assessee) will have to pay interest on amount that is advanced by finance company to manufacturer of plant and machinery. It is such interest paid on such advances that is shown as interest on leased assets above. For erection of machinery, certain structures had to be erected and in that connection, assessee had incurred expenditure, which is shown as civil work on leased assets above. 4. In its books of account, assessee considered entire cost as listed above as revenue expenditure but deferred claiming entire sum as expenditure relating to previous year. According to assessee, benefit of this expenditure would accrue to assessee for certain number of years and, therefore, proportionate expenditure alone had been claimed in books of account. sum of Rs. 2,94,837 had been claimed as expenditure in P&L a/c. However, in computation of income filed along with return of income, entire expenditure incurred was claimed as revenue expenditure. 5. AO was of view that expenditure was of capital nature. He allowed only deduction of Rs. 2,94,837 debited in P&L a/c and disallowed claim for deduction of sum of Rs. 78,47,447. Aggrieved by order of AO, assessee preferred appeal before CIT(A). Before CIT(A), assessee contended as follows : (a) That action of AO in allowing portion of expenditure debited to P&L a/c and refusing to allow part of very same expenditure as capital expenditure was unwarranted. (b) That interest paid on leased assets represented interest on amount advanced to supplier of machinery and payment of such interest during intervening period, i.e., period before commencement of lease and payment of lease charges was also in nature of interest akin to payment of interest on funds borrowed for purpose of business. Reliance was placed on decision of Tribunal, Delhi Bench, in ITA No. 6201/Del/1992 in case ofModi Xerox Ltd.,dt. 31st March, 1999, wherein proposition to above effect has been laid down. (c) That civil work carried out by assessee for carrying out installation of lease assets does not result in any enduring advantage in capital field since ownership of assets never vests in assessee and, therefore, such expenditure was of revenue nature. Reliance was placed on decision of Hon'ble Gujarat High Court in case ofCIT vs. Alembic Chemical Works Ltd. (1995) 123 CTR (Guj) 551. (d) That management fee paid to HDFC being in nature of lease rent does not result in any enduring benefit to assessee and was allowable as revenue expenditure in connection with business. (e) That entries in books of account by assessee by carrying only part of expenditure as revenue expenditure and deferring remaining expenditure and claiming it over period of time is not conclusive when allowing deduction under IT Act. Reliance was placed on decisions of Hon'ble Supreme Court in cases ofKedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC)andSutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC). 6. CIT(A) held : (A) That interest paid on advances to suppliers of machinery was akin to interest on funds borrowed for purpose of business and was to be allowed s deduction. CIT(A) also found that later assets were installed and lease rentals were also paid by assessee and allowed as deduction. He, therefore, held that interest on leased assets was also allowable expenditure and directed AO to allow deduction of interest paid on leased assets. (b) With regard to civil work on leased assets, and (c) management fee paid to HDFC, CIT(A) held as follows : (B) Installation charges : 1. From details filed, it was clear that technically it is highly specific machine. At time machine was leased, assessee had monopoly of manufacturing four stroke engines. In other words, machine could not be taken back by lessor and leased to anyone else. It was specifically manufactured for assessee and assessee had taken it on lease on permanent basis, as per ground realities though on paper it was 5 years lease only. 2. It cannot be used by anyone else, i.e., it cannot be removed from place where it was installed and leased to someone else. 3. controlling power in both companies, i.e., lessor and lessee is one, Mr. Brij Mohan Munjal. So, naturally, machine has been purchased specifically for use of lessee and forever, i.e., till life of machine. 4. It has been leased initially for 5 years and lease period will be extended further again and again and so on. Lease is only format given, benefit is permanent. On these facts, it is clear that it is benefit of enduring nature and installation charges have been incurred once for all. I hold that it is capital expense and see no reason to interfere. (C) Management fee to HDFC For same reasons as discussed for disallowing expenditure on civil work, CIT(A) held that this payment has been made to acquire benefit of enduring nature and fee has to be treated as capital expense and found no reason to interfere with action of AO. 7. Aggrieved by order of CIT(A) in confirming order of AO with regard to disallowance of expenditure on civil work on leased assets and management fee paid to HDFC, assessee is in appeal before us. Aggrieved by order of CIT(A) in directing AO to allow claim for deduction of expenditure on leased assets, Revenue is in appeal. 8 . We have heard rival submissions. As far as assessee's ground of appeal is concerned, learned counsel for assessee reiterated submissions as were made before CIT(A) while learned Departmental Representative relied on order of Revenue authorities. We are of view that order of CIT(A) on this aspect cannot be sustained. ownership of assets which were installed for purpose of assessee's business and in connection with installation of which assets civil work was carried out, did not vest with assessee. CIT(A) seems to have got carried away by fact that said item of machinery cannot be used by anyone else and, therefore, its lease, though on paper was for period of 5 years, was in reality to be leased to assessee permanently. This factor cannot divest ownership in goods from lessor to lessee, viz., assessee. CIT(A) seems to have drawn this conclusion on his observation that controlling interest in both companies, viz., assessee-company and M/s Hero Honda Fin Lease Ltd. (the lessor company), was both held by one and same person. assessee and lessor company were two different persons in eye of law. Their relationship vis-a-vis asset leased was that of lessor and lessee and such relationship is clearly evidenced by lease deed. There was no basis for CIT(A) to draw his conclusions as has been done in his order. There is no evidence on record to justify conclusion of CIT(A) that asset was likely to be in possession of assessee forever and permanently. conclusions of CIT(A) are based on conjectures. Hon'ble Gujarat High Court in case ofAlembic Chemicals(supra) has held that where cable and other things are installed for sake of not installing them as assets and were for purpose of working of computers which were taken on hire and which were capable of being removed by lessor anytime taken on hire and which were capable of being removed by lessor anytime after expiry of lease, was held not to result in advantage of enduring nature and such expenditure was held to be allowable revenue expenditure. On facts of present case, we are of view that expenditure in question was not of capital nature and was allowable as deduction. management fee paid to HDFC for arranging for transaction of lease of machinery is duly evidenced by agreement and was allowable deduction being of revenue nature. machinery in question not being owned by assessee, there was n o basis to treat expenditure as capital expenditure. orders of Revenue authorities are , therefore, not proper. We, therefore, direct AO to l l o w expenditure claimed towards civil work on leased assets and management fee paid to HDFC on leased assets. ground of appeal of assessee is allowed. 9. Regarding ground of appeal of Revenue, we are of view that order of CIT(A) is just and proper and calls for no interference. expenditure was of revenue nature akin to interest on funds borrowed for purpose of business. borrowing was in respect of asset, which was to be taken on lease and ownership of which was never contemplated as that of assessee. There is no ground to interfere with order of CIT(A). 1 0 . One of reasons assigned by AO for making impugned disallowance was treatment given by assessee in respect of this item of expenditure as deferred revenue expenditure in its books of account. It is pertinent to ascertain as to whether such expenditure has been treated by assessee as capital expenditure in its books of account. In this regard, we find that assessee has treated said expenditure as "deferred revenue expenditure" considering advantage of enduring nature that is likely to accrue to it in sense, advantage which was going to last for few years beyond previous year. When any expenditure is treated as "deferred revenue expenditure", it presupposes that concerned expenditure, creating benefit is in revenue field and is revenue expenditure, but considering its enduring benefits as well as fact that it does not result in creation of any new asset or advantage of enduring nature in capital field, same is required to be treated distinctly from capital expenditure. In any case, as held by Supreme Court in case ofKedarnath Jute Mfg. Co. Ltd. vs. CIT(supra), allowability of particular deduction depends on provisions of law relating thereto and not on basis of entries made in books of account, which are not decisive or conclusive in this regard. We, therefore, find no basis for conclusion drawn by AO in this regard. 1 1 . Grounds 1 and 1.1 of grounds of appeal of assessee are allowed, while 3rd ground of appeal of Revenue is dismissed. 12. Grounds 2 and 2.1 of grounds of appeal of assessee read as follows : 2. That CIT(A) erred on facts and in law in not adjudicating upon disallowance of investment allowance of Rs. 6,52,217 in respect of increase in value of assets on account of exchange rate fluctuation. 2.1 That without prejudice, that CIT(A) erred on facts and in law in not directing to allow investment allowance on increase in actual cost of fixed assets on account of foreign exchange fluctuation to extent enhanced liability is actually paid. 13. facts relevant for adjudication of this issue are as follows. assessee was entitled to claim investment allowance in respect of assets purchased. assets had been purchased on loans taken in foreign currency. cost of machinery on which investment allowance was to be allowed was, therefore, subject to fluctuations depending on fluctuation in foreign exchange currency. assessee had claimed investment allowance amounting t o Rs. 6,52,217 @ 20 per cent of foreign exchange fluctuations aggregating to Rs. 32,61,085 in respect of loans taken in foreign currency for acquisition of assets. deduction on account of investment allowance was claimed in return of income. There was no debit to P&L a/c in respect of deduction claimed. amount of Rs. 32,61,085 comprised of actual payment of enhanced liability during relevant previous year amounting to Rs. 29,76,979 and provision for increase in actual cost on notional basis comprising of Rs. 2,84,108. AO disallowed claim following orders of earlier years on ground that investment allowance was not admissible on foreign exchange fluctuations on notional basis. AO added back amount to income of appellant, without appreciating that same had never been debited to P&L a/c. CIT(A), however, did not deal with issue and instead only issued directions to AO to rectify order to extent of addition of aforesaid amount made in figure of net profit since same had not been debited to P&L a/c by appellant. Though similar issue had arisen for consideration in assessee's own case for asst. yr. 1990-91 in ITA No. 5772/Del/1995 and this Tribunal had allowed claim of assessee, since CIT(A) had not decided issue, it would be proper to set aside order of CIT(A) on this issue and direct CIT(A) to consider issue afresh after affording assessee opportunity of being heard. Ground No. 2 is treated as allowed for statistical purposes, while ground No. 2.1 is dismissed as not arising out of order of CIT(A) at present. 14. 3rd ground of appeal of assessee reads as follows : 3. That learned CIT(A) erred on facts and in law in confirming disallowance of deduction under s. 35D of Act of Rs. 9,000 in respect of fee paid to Registrar of Companies for increase in authorised capital holding that same was not pre-commencement expenditure covered by s. 35D of Act. facts and circumstances under which aforesaid ground of appeal arises are as follows. assessee had claimed deduction of Rs. 9,000 being 1/10th of expenditure being fee paid to Registrar of Companies during financial year 1994-95 towards increase of authorised share capital. In asst. yr. 1995-96, claim for deduction under s. 35D was allowed. In present assessment year, AO disallowed claim for deduction relying on decision of Hon'ble Delhi High Court in case ofBharat Carbon & Ribbon Mfg. Co. Ltd. vs. CIT (1981) 127 ITR 239 (Del),wherein it has been held that such expenditure was capital in nature. On appeal by assessee, CIT(A) held that assessee did not fulfil necessary conditions for allowing relief under s. 35D. Aggrieved by order of CIT(A), assessee has raised aforesaid ground of appeal. We have heard rival submissions. provisions of s. 35D read as follows : 35D. Amortisation of certain preliminary expenses '(1) Where assessee, being Indian company or person (other than company) who is resident in India, incurs after 31st day of March, 1970, any expenditure specified in sub- s. (2). (i) before commencement of his business, or (ii) after commencement of his business in connection with extension of his industrial undertaking or in connection with his setting up new industrial unit, assessee shall, in accordance with and subject to provisions of this section, be allowed deduction of amount equal to one-tenth of such expenditure for each of ten successive previous years beginning with previous year in which business commences or, as case may be, previous year in which extension of industrial undertaking is completed or new industrial unit commences production or operation. assessee in present case has neither incurred expenditure in question before commencement of his business nor has expenditure been incurred in connection with extension of his industrial undertaking or in connection with his setting up new industrial unit. order of CIT(A) is, therefore, confirmed and this ground of appeal of assessee is dismissed. 15. 4th ground of appeal of assessee reads as follows : 4. That learned CIT(A) erred on facts and in law in confirming disallowance of Rs. 1,12,272 and Rs. 1,519 out of club subscription. 16. assessee during relevant previous year made payments to various clubs, details of which are as follows : (a) Membership subscription Rs. 1,12,272 (b) Corporate membership fee of Delhi Golf Club Rs. 1,519 AO disallowed claim of assessee for deduction of these expenses holding that they were non-business expenditure. On appeal by assessee, CIT(A) held that expenditures were personal expenses of directors and directors entertained their personal friends and relatives and also business associates. If some expenditure incurred by directors to entertain clients or business associates at clubs is reimbursed by company or met by company, claim for deduction can be considered as business expenditure but not membership subscription paid by company. Aggrieved by order of CIT(A), assessee is in appeal before us. We have heard rival submissions. details of subscription paid are at p. 130 of assessee's paper book. description given in said details reads as payment towards corporate membership. In orders of Revenue authorities, however, there is reference to fact that it is individual membership of directors. Be that as it may, we find that several High Courts and various Benches of Tribunals have taken uniform view that such membership enables directors and executives to socialise and develop contacts with various persons for promoting company's business interests and was, therefore, to be considered as expenditure in connection with business. decisions are as follows : (a)Otis Elevators Co. India Ltd. vs. CIT (1991) 96 CTR (Bom) 14 : (1992) 195 ITR 682 (Bom) (b)Gujarat State Export Corpn. Ltd. vs. CIT (1996) 131 CTR (Guj) 23 : (1994) 209 ITR 649 (Guj) (c)CIT vs. Sundaram Industries Ltd. (2000) 158 CTR (Mad) 437 : (1999) 240 ITR 335 (Mad) (d)Gujarat Petrosynthesis Ltd. vs. Dy. CIT (2001) 71 TTJ (Ahd) 349 : (2001) 76 ITD 257 (Ahd) (e)ITO vs. Soya Production & Research Association (1985) 22 TTJ (Del) 594. Respectfully following ratio laid down in aforesaid decisions referred to above, we direct AO to delete addition made in this regard. 4th ground of appeal of assessee is allowed. 17. 5th ground of appeal of assessee reads as follows : 5. That learned CIT(A) erred on facts and in law in confirming disallowance of foreign travelling expenses incurred on visit of Mrs. Santosh Munjal, wife of director, to South Africa holding same to be non-business expenditure. 18. above ground of appeal can conveniently be decided together with ground No. 7 of grounds of appeal of Revenue in ITA No. 2906/Del/2000, which reads as follows : 7. That on facts and in circumstances of case, learned CIT(A) has erred in restricting disallowance of foreign travelling expenses of wife of CMD though she was not employee of assessee-company. 19. facts and circumstances under which both aforesaid grounds of appeal arise are as follows. assessee had during previous year incurred expenditure of Rs. 30.55 lakhs on foreign travel expenses of directors. AO called for details of foreign travel expenses. On scrutiny of details filed in this regard, AO noticed that foreign travel expenses also included expenditure in connection with foreign travel of Mrs. Santosh Munjal w/o chairman and managing director, Mr. Brij Mohanlal Munjal, who had travelled with CMD on 21st June, 1995, to Mauritius and on 22nd July, 1995, to South Africa. AO thereafter called upon assessee to show cause as to why portion of expenditure relating to foreign travel of Mrs. Santosh Munjal be not disallowed as she was neither employee of assessee nor was her travel abroad necessary for business of assessee. In reply, assessee stated that to strengthen business relations and in order to promote exports, CMD had undertaken foreign travel along with his wife and that it is common business practice for wife to accompany director/executive on such visits. AO, however, disallowed expenditure of Rs. 4,84,734 being proportionate expenditure incurred on foreign travel of Mrs. Santosh Munjal. On appeal by assessee before CIT(A), it was contended that visit to Mauritius was on invitation extended to CMD and his wife by Confederation of Indian Industry (CII) to head delegation visiting Mauritius. It was further explained that vehicles of assessee were being exported to South Africa and there was substantial fall in exports in past, and CMD had to visit South Africa to participate in Poojas that were being performed there. It was also contended that social custom abroad and in particular western countries was that spouse accompanies executive. CIT(A) held as follows : For this visit reason given is that export sales were declining. First of all this point has not been substantiated with help of facts and figures. Then reason given defies logic. How will participation by wife of director in Pooja ceremonies enhance sales ? And how did this help business interests in South Africa has not been established before me. Regarding Authorised Representative's reliance on decision ofJ.K. Synthetics, facts are clearly different. There wives of employees had gone, not director. Though employee on paper, for all practical purposes, director is owner and not employee. foreign visit of employee accompanied by wife can be incentive to employee but not to director. director is already motivated enough in terms of business and does not require company of wife to further motivate him. This would be true of employee not employee- director. This expense is not allowed for business purpose. AO is directed accordingly. 20. Aggrieved by order of CIT(A) upholding part of expenses disallowed, assessee is in appeal before us. Aggrieved by order of CIT(A) in allowing partial relief, Revenue is in appeal before us. 2 1 . We have heard rival submissions. Special Bench of Tribunal, Bombay Bench, in case ofGlaxo Laboratories (India) Ltd. vs. ITO (1986) 26 TTJ (Mumbai) 214 : (1986) 18 ITD 226 (Mumbai)held as follows : "In modern age, and moreso in western countries, senior executives are, as matter of social custom, accompanied by their wives when they visit, though for business purposes, has necessarily some social aspects also." Hon'ble High Courts and Tribunals have expressed similar views in following cases : (a)CIT vs. Apollo Tyres Ltd. (1998) 149 CTR (Ker) 538 : (1999) 237 ITR 706 (Ker) (b)CIT vs. Sundaram Clayton Ltd. (2001) 166 CTR (Mad) 322 : (1999) 105 Taxman 545 (Mad) (c)ITO vs. J.K. Synthetics Ltd. (1986) 18 ITD 490 (Del) (d)ITO vs. A.F. Ferguson & Co. (1987) 27 TTJ (Mumbai) 90 : (1986) 19 ITD 620 (Mumbai) 2 2 . In present case, visit to Mauritius at invitation of Confederation of Indian Industries, by wife of CMD along with CMD was, therefore, to be considered as for business purpose and allowed as deduction. ground of appeal of Revenue, therefore, deserves to be dismissed. As far as assessee's appeal regarding foreign travel expenses of wife of CMD to South Africa is concerned, visit apparently is to participate in Poojas carried out at South Africa. There is no reference to any meeting with any foreign business associates. There is nothing to suggest any business necessity for undertaking these visits. visit of various outlets in South Africa is claimed to be goodwill visit. explanation given in our view was not sufficient to conclude that visit by wife of CMD was necessary and consequently, to that extent, expenditure is liable to be disallowed. In our view, order of CIT(A) is just and proper and calls for no interference. same is confirmed and fifth ground of appeal of assessee is dismissed. 23. Grounds 6, 6.1 and 6.2 of grounds of appeal of assessee read as follows : 6. That learned CIT(A) erred on facts and in law in confirming action of AO in allowing amortisation of technical know-how fee of Rs. 115.67 lakhs as per provisions of s. 35AB of Act as against revenue deduction claimed by assessee. 6.1 That learned CIT(A) erred on facts and in law in not appreciating that provisions of s. 35AB of Act are not attracted in case of payment of fee for mere use of technical know-how as opposed to acquisition of technical know-how. 6.2 That learned CIT(A) erred on facts and in observing that there is hardly any case for grievance of assessee because in any case, assessee will get deduction of expenditure in six years and not in one year. 24. assessee had during previous year, paid net amount of Rs. 92.53 lakhs (gross Rs. 115.66 lakhs minus tax deducted at source of Rs. 23.13 lakhs) to Honda Motor Company Ltd., Japan, towards first instalment of technical know-how fee, which was claimed as deduction under s. 37(1) of Act. A O denied claim for deduction holding that expenditure was capital expenditure. Alternatively, AO held that expenditure would fall under category of capital expenditure mentioned in s. 35AB of Act and that assessee would be entitled to deduction of 1/6th of expenditure. deduction of Rs. 15.42 lakhs was allowed and claim for deduction of remaining sum was refused. On appeal by assessee before CIT(A), it was contended that payment in question was made to Japanese company under technical collaboration agreement dt. 2nd June, 1995, and that under aforesaid agreement, assessee was granted only exclusive licence to manufacture, assemble, sell and distribute products and parts, and that there was no absolute transfer of technology in favour of assessee. That under agreement, Japanese collaborator continues to remain sole and exclusive owner of know-how, technical information, etc., and that assessee was debarred from claiming any title to said rights. That after termination of agreement, assessee was prohibited from disclosing these informations, processes and inventions during currency and also after termination of this agreement. That even during currency of agreement, assessee was obliged to keep secret and confidential information furnished by Japanese collaborator and that assessee was also prohibited from sub-licensing know-how to any third party. It was contended that payment for license to use know-how was revenue expenditure and reliance was placed on decisions of Hon'ble Supreme Court in cases ofCIT vs. placed on decisions of Hon'ble Supreme Court in cases ofCIT vs. CIBA India Ltd. (1968) 69 ITR 692 (SC), Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC). Further reliance was also placed on decisions of Hon'ble Delhi High Court in cases ofShriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746 (Del), Triveni Engineering Works Ltd. vs. CIT (1982) 29 CTR (Del) 234 : (1982) 136 ITR 340 (Del), Addl. CIT vs. Shama Engine Valves Ltd. (1983) 32 CTR (Del) 351 : (1982) 138 ITR 216 (Del)andCIT vs. Bhai Sunder Dass & Sons (P) Ltd. (1986) 158 ITR 195 (Del). It was further contended that insertion of provisions of s. 35AB allowed amortisation of capital expenditure alone and that said section makes reference to acquisition of any know-how for use for purpose of business. It was submitted that since expenditure in question was only for limited use of know-how without acquiring any right of ownership of know-how, it was neither capital expenditure nor was expenditure incurred for acquisition of know-how and, therefore, provisions of s. 35AB never applied to facts of case. It was also contended that what was allowable as deduction under s. 37 as revenue expenditure was never sought to be superseded by provisions of s. 35AB of Act. Reliance was placed on decision of Tribunal, Calcutta Bench, in case ofWellman Incandescent India Ltd. vs. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1995) 55 ITD 338 (Cal). CIT(A), however, held that expenditure was of capital nature and fell within parameters of s. 35AB of Act and that assessee was entitled to claim only 1/6th of expenditure as laid down therein. Aggrieved by order of CIT(A), assessee is in appeal before us. 2 5 . We have heard rival submissions. question for our consideration is as to whether expenditure is capital expenditure ? Whether expenditure would fall within parameters of s. 35AB of Act and, therefore, assessee would be entitled to only 1/6th of expenditure as deduction ? 26. terms of agreement for use of technical know-how need to be adverted to. copy of agreement dt. 2nd June, 1995, is placed at pp. 149 to 184 of assessee's paper book. Japanese collaborator is referred to as licensor and assessee as licensee under aforesaid agreement. Art. 2 of agreement reads as follows : Grant of License : Subject to terms and conditions herein contained, licensor hereby grants to licensee indivisible and non-transferable exclusive right and license, without right to grant sub-licenses to manufacture, assemble, sell and distribute products and parts during terms of this agreement within territory under intellectual property rights and by using technical information. Under art. 4, licensor has agreed to provide technical information and guidance necessary for manufacture of products and parts by licensee. Under art. 17, it is clearly agreed that know-how, technical information and any other public (sic), technical or business information shall remain sole and exclusive property of licensor and shall be held in trust and confidence for licensor by licensee and that licensee shall not divulge or communicate information to any other person, that information obtained will be kept secret and confidential. Under cl. 18.5, it is specifically agreed that licensee shall claim no title or property right whatsoever during existence of agreement and if agreement is terminated, licensee shall not claim any right, title, property, interest or use whatsoever at all times after life of agreement as regards use of intellectual property rights, know-how, technical information or other information received under agreement. 27. above terms clearly show that assessee was merely entitled to use know-how for manufacture of motor-cycles and its parts. law is settled that expenditure incurred on payment for use of technical know-how for limited duration as opposed to payment for acquisition thereof is allowable as deduction under s. 37(1) of Act. consideration paid for acquiring any know-how for purpose of business was held to be capital expenditure, not allowable as deduction under s. 37(1) of Act. consensus of judicial opinion was that expenditure for acquiring technical know-how was different from expenditure incurred for obtaining mere use of technical know-how and information, which was allowable as revenue expenditure. We may refer only to three decisions of Supreme Court on this point as laying down law in this behalf. first is decision inCIT vs. CIBA India Ltd.(supra), where it was held that payments made for right to have access to technical knowledge and fruits of continuing research and experience of foreign company and to use its patents and trademarks were on revenue account. InAlembic Chemical Works Co. Ltd. vs. CIT(supra), Supreme Court again held that lump sum consideration paid for obtaining technical know-how in order to achieve higher levels of production by better technology was allowable as revenue expenditure. emphasis in all these cases was that if payment is made for exclusive acquisition of technical know-how or information, expenditure would be capital, but if payment was made only to secure use of technical know-how or knowledge, it would be allowable as revenue expenditure. In present case as we have already explained, assessee had only mere right to use know-how and did not acquire ownership of any know-how. expenditure was, therefore, not capital expenditure and was revenue expenditure allowable under s. 37(1). 28. next question is whether expenditure in question is covered by provisions of s. 35AB ? If it is covered by said provisions, assessee would get deduction of 1/6th of expenditure for each of six assessment years and it would be entitled to amortise entire expenditure in 6 years. If expenditure is outside purview of s. 35AB and was revenue expenditure in nature, assessee would be entitled to claim entire sum as deduction in one assessment year itself. Sec. 35AB was introduced into IT Act by Finance Act, 1985, w.e.f. 1st April, 1986. section is as under : "35AB. (1) Subject to provisions of sub-s. (2), where assessee has paid in any previous year any lump sum consideration for acquiring any know- how for use for purposes of his business, one-sixth of amount so paid shall be deducted in computing profits and gains of business for that previous year, and balance amount shall be deducted in equal instalments for each of five immediately succeeding previous years. (2) Where know-how referred to in sub-s. (1) is developed in laboratory, university or institution referred to in sub-s. (2B) of s. 32A, one-third of said lump sum consideration paid in previous year by assessee shall be deducted in computing in profits and gains of business for that year, and balance amount shall be deducted in equal instalments for each of two immediately succeeding previous years. Explanation : For purposes of this section, "know-how" means any industrial information or technique likely to assist in manufacture or processing of goods or in working of mine, oil well or other sources of mineral deposits (including searching for, discovery or testing of deposits or winning of access thereto)." 29. To fall within parameters of s. 35AB, assessee must have paid lump sum consideration for acquisition of any know-how for use for purpose of business. expression "acquired" used in s. 35AB, as we have already observed, refers to situation where ownership is acquired by assessee and not to case of mere right to use technical know-how. expression "acquired" means to become full owner of property with full and absolute right, title and interest. On reading of terms of agreement, it is clear that assessee never became owner of know-how. Consequently, provisions of s. 35AB did not apply to assessee. What was allowed by provisions of s. 35AB was expenditure which was of capital nature and which was not allowable as deduction under s. 37(1) of Act. said provisions do not affect right of assessee to claim deduction of expenditure which was legitimately allowable under s. 37(1) of Act. learned counsel for assessee has placed reliance on several judicial pronouncements of Hon'ble Supreme Court/High Courts and decisions of Tribunals on this aspect. We do not wish to make reference to all those decisions as those decisions lay down principle relying on which we have set out in nutshell, principle as stated above. We are, therefore, of view that disallowance of part of know- how fee paid by applying provisions of s. 35AB was not proper. entire expenditure ought to be allowed as deduction. relevant grounds of appeal of assessee are allowed. 30. 7th and 8th grounds of appeal of assessee read as follows : 7. That learned CIT(A) erred on facts and in law in holding interest earned on temporary deposit of surplus funds of business, other than bill discounting and advances to employees as 'Income from other sources' instead of 'profits and gains from business or profession'. 8. That learned CIT(A) erred on facts and in law in confirming action of AO in allowing deduction under s. 80HHC of Act at Rs. 1,61,46,627 as against Rs. 1,92,50,997 claimed by assessee by' (a) excluding interest on temporary deposit of surplus funds of business, other than bill discounting and advances to employees from business profits; (b) not treating customs duty benefit of Rs. 1,51,89,229 under advance licence scheme as part of business profit; (c) not excluding excise duty and sales-tax amounting to Rs. 143 crores n d Rs. 28 crores, respectively, from total turnover for purpose of computing deduction under s. 80HHC of Act. 31. decision on 8th ground of appeal will also dispose ground No. 7. facts with regard to ground No. 8 are as follows. assessee was entitled to claim deduction under s. 80HHC of Act. While computing deduction under s. 80HHC of Act, assessee had taken into consideration interest income of Rs. 1,64,78,854 as business income. This interest earned comprised of following'Interest on inter-corporate deposits, loans advanced to employees and bill discounting charges. According to AO, such interest income was to be assessed under head "Income from other sources" and not "Income from business". AO made reference to decision of Hon'ble Supreme Court in case ofTuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC)in support of his conclusion wherein Hon'ble Supreme Court has held that interest earned on short-term deposits will be treated as income from other sources. assessee had during relevant previous year availed rebate of customs duty for import of components against advance licence issued under Imports & Exports (Control) Act, 1947, used for manufacture of motor-cycles amounting to Rs. 1,51,89,229. aforesaid amount was also taken into account by assessee for claiming deduction under s. 80HHC as profits and gains of business. According to assessee, said amount was covered under s. 28(iiic) of Act. According to AO, it was only customs or excise duty repaid or repayable as drawback against expenditure under Customs & Central Excise Duty Drawback Rules, 1971, that is to be considered as income from business under s. 28(iiic) of Act. benefit received by assessee in form of duty savings against advance licence, according to AO, was not income from business. AO also held that assessee has not shown this benefit in form of customs duty benefit as income. AO thus excluded this sum also while allowing benefit of s. 80HHC to assessee. assessee while computing deduction under s. 80HHC had taken total turnover at Rs. 631.59 crores. This total turnover was taken net of excise and sales-tax of Rs. 143 crores and 28 crores, respectively. AO was of view that these amounts will also form part of turnover and added to total turnover while allowing deduction under s. 80HHC. As result of action of AO, deduction under s. 80HHC was allowed only to extent of Rs. 1,61,46,627 as against sum of Rs. 1,92,50,997 claimed by assessee. 3 2 . Aggrieved by order of AO, assessee preferred appeal before CIT(A). Before CIT(A), assessee contended that deployment of temporary surplus business funds in form of ICDs was inextricably linked with main business and arose out of said business only. It was also contended that impugned investment in ICDs was assessee's current asset and was, therefore, to be considered as business asset and any income arising out of business asset shall be considered as business income. Reliance was placed on following decisions : (i)CIT vs. A.P. Industrial Infrastructure Corpn. Ltd. (1989) 175 ITR 361 (AP) (ii)CIT vs. Tirupati Woollen Mills Ltd. (1992) 193 ITR 252 (Cal) (iii)CIT vs. Tamil Nadu Dairy Development Corpn. Ltd. (1995) 216 ITR 535 (Mad). 33. As far as this plea of assessee is concerned, CIT(A) held that since funds which were invested in ICDs were admittedly surplus funds which were lying idle, earning of interest on such deployment of funds shall be considered as income from other sources. He also held that there was no business compulsion or business necessity for deployment of funds in ICDs. CIT(A), therefore, considered interest income earned on inter-corporate deposit as income from other sources. With regard to action of AO in not treating customs duty benefit under advance licensing scheme as part of business profits, it was contended by assessee that duty drawback as defined by Customs and Central Excise Duties Drawback Rules, 1971, speaks of rebate of duty chargeable on any imported material used in manufacture of such goods and exported out of India. assessee drew attention of CIT(A) to provisions of advance licensing scheme notified by Government and submitted that customs duty benefit which assessee gets under advance licensing scheme is akin to duty drawback as defined in Customs and Central Excise Duties Rules, 1971, and, therefore, said income would fall within ambit of s. 28(iiic) of Act and, therefore, same should be considered as business income. CIT(A) held that rebate of duty under advance licensing scheme cannot be equated with duty drawback as envisaged under s. 28(iiic) of Act and, therefore, same cannot be considered as business income. As far as action of AO in not excluding excise duty and sales-tax as part of total turnover while computing deduction under s. 80HHC of Act is concerned, assessee relied on decision of Calcutta Bench of Tribunal in case ofChloride India Ltd. vs. Dy. CIT (1995) 53 ITD 180 (Cal)and of decision of Pune Bench of Tribunal in case ofSudershan Chemical Industries vs. Dy. CIT (1997) 57 TTJ (Pune) 718 : (1997) 60 ITD 629 (Pune),wherein it has been held by Tribunal that total turnover for purpose of s. 80HHC does not include statutory levies such as excess sales-tax. CIT(A), however, held that expression 'total turnover' has not been defined under s. 80HHC of Act and, therefore, its meaning in common parlance should be considered. According to CIT(A), meaning of words 'total turnover' in common parlance would denote gross receipt inclusive of sales-tax and customs duty. Accordingly, CIT(A) confirmed order of AO. 34. Aggrieved by order of CIT(A), assessee is in appeal before us. We have heard rival submissions. learned counsel for assessee reiterated his submissions as were made before AO. With regard to interest income not having been considered as income from business, learned counsel further relied on decision of Special Bench of Tribunal in case ofRajiv Enterprises vs. AO (2003) 261 ITR 34 (Jp)(SB)(AT). Further reliance was placed on following decisions : (i)CIT vs. Nagpur Engineering Co. Ltd. (2000) 245 ITR 806 (Bom) (ii)S. Damanjit Singh vs. Asstt. CIT (2002) 121 Taxman 303 (Del)(Mag) (iii)Honda Siel Power Products Ltd. vs. Dy. CIT (2000) 69 TTJ (Del) 97 : (2001) 77 ITD 123 (Del) (iv)Dy. CIT vs. Punjab State Electronics & Devp. Production Corpn. Ltd. (2002) 120 Taxman 119 (Chd)(Mag) (v)Shiva Shankar Granites (P) Ltd. vs. ITO (2002) 75 TTJ (Hyd) 535 : (2002) 81 ITD 106 (Hyd). 3 5 . With regard to excise duty benefit received under advance licensing scheme, learned counsel relied on decision of Ahmedabad Bench of Tribunal in case ofAsstt. CIT vs. Pratibha Syntax Ltd. (1999) 63 TTJ (Ahd) 409,wherein Ahmedabad Bench of Tribunal while considering case of claim under s. 80HHC of Act held that total benefit derived by assessee on duty-free imports will form part of profit of business under s. 28(iiib) of Act. Tribunal found that under s. 28(iiib) of Act, expression used was cash assistance received by assessee by whatever name called and expression "whatever name called" was held to include any duty benefit derived by assessee on duty-free imports. On basis of this decision, it was submitted that claim of assessee should be considered under s. 28(iiib) of Act. With regard to non-exclusion of excise duty and sales-tax, while computing total turnover, reliance was placed on following decisions : (i)CIT vs. Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596 : (2000) 245 ITR 769 (Bom) (ii)CIT vs. Wolkem India Ltd. (2003) 180 CTR (Raj) 382 : (2003) 259 ITR 430 (Raj) (iii)IFB Agro Industries Ltd. vs. Dy. CIT (2003) 78 TTJ (Cal)(SB) 177 : (2002) 261 ITR 17 (Cal)(SB)(AT) (iv)Avon Cycles vs. Asstt. CIT (1997) 59 TTJ (Chd) 75 (v)Shri Dinesh Mills Ltd. vs. Asstt. CIT (2001) 72 TTJ (Ahd) 990 (vi)Ambika Cotton Mills Ltd. vs. Jt. CIT (2001) 71 TTJ (Mad) 871 (vii)CIT vs. Bharat Earth Movers Ltd. (2004) 188 CTR (Kar) 488. 36. learned Departmental Representative relied on orders of Revenue authorities. We have considered rival submissions. As far as interest on inter-corporate deposits is concerned, as rightly held by CIT(A), it has not been shown to have any link with business of assessee. Admittedly, funds were surplus funds which were temporarily invested to earn income. It was not business of assessee to invest monies and earn interest income. decisions relied upon by learned counsel for assessee are not of any assistance in view of decision of Hon'ble Supreme Court in case ofTuticorin Alkali Chemicals Ltd.(supra). Since income in question has not been shown to have inextricable links with business of assessee, income has rightly been considered as income from other sources. Ground No. 7 of assessee is, therefore, dismissed and part of ground No. 8 is also dismissed. As far as customs duty benefit received by assessee under advance licensing scheme is concerned, as rightly held by CIT(A), same would not fall within ambit of s. 28(iiic) of Act, but as held by Ahmedabad Bench of Tribunal in case ofPratibha Syntex Ltd.(supra), case of assessee would fall within parameters of s. 28(iiib) of Act. This would be residuary clause as held by Tribunal and, therefore, any other reliefs given in any form to exporter will fall within said clause. Respectfully following decision referred to above, we hold that excise duty benefit should form part of income from business of assessee while computing deduction under s. 80HHC of Act. With regard to customs duty and sales-tax having been included as part of total turnover while computing deduction under s. 80HHC of Act, decision of CIT(A) cannot be sustained in view of decision of Hon'ble Bombay High Court in case ofSudarshan Chemicals Industries Ltd.(supra), wherein Hon'ble Bombay High Court has held that excise duty and sales-tax should not be included in total turnover while computing deduction under s. 80HHC of Act. In view of above, excise duty and sales-tax are directed to be excluded from total turnover while computing deduction under s. 80HHC of Act. Ground No. 8 is partly allowed. 37. In result, appeal filed by assessee is partly allowed. 38. Now, we shall take up for consideration appeal by Revenue, i.e., ITA No. 2906/Del/2000. first ground of appeal of Revenue reads as follows : 1. That on facts and circumstances of case, learned CIT(A) has erred in allowing relief under s. 80HH maintaining that first year of manufacture or production is first year of production of commercial manufacture though there is no distinction under s. 80HH between commercial manufacturing or trial production. 3 9 . facts and circumstances giving rise to aforesaid ground of appeal are as follows. assessee was entitled to claim deduction under s. 80HH of IT Act. It claimed deduction under s. 80HH of IT Act of sum of Rs. 7,07,83,477 in present assessment year, i.e., 1996-97. Under provisions of s. 80HH of IT Act, where gross total in case of assessee includes any profits and gains derived from industrial undertaking which begins to manufacture or produce articles after 31st Dec., 1970, but before 1st April, 1990, in any backward area, deduction from total income of such assessee equal to 20 per cent of profits and gains is allowed. Sub-s. (4) of s. 80HH lays down period during which deduction is allowed under s. 80HH and it lays down that deduction is to be allowed for 10 assessment years beginning with assessment year relevant to previous year in which industrial undertaking begins to manufacture or produce articles. dispute in present ground of appeal is to year in which industrial undertaking began to manufacture or produce articles. To appreciate stand of Revenue and assessee, we may have to narrate dispute in case of assessee for asst. yr. 1986-87. assessee is in business of manufacture and sale of motor-cycles in collaboration with M/s Honda Motor Cycles of Japan. assessee-company was incorporated on 19th Jan., 1984, and closed its books on 30th April, 1985. asst. yr. 1986-87 was its first year of business. assessee claimed deduction of certain expenses incurred w.e.f. 16th March, 1985, to end of previous year on ground that it had already set up its business during previous year when trial production had commenced on 16th March, 1985. AO disallowed claim for deduction of these expenses on ground that business of assessee had not commenced during previous year relevant to asst. yr. 1986-87. On appeal by assessee, learned CIT(A) held that assessee had set up its business during previous year relevant to asst. yr. 1986-87. On further appeal by Revenue before Tribunal, order of learned CIT(A) was confirmed. Revenue had contended in said appeal before Tribunal that only 35 motor-cycles had been manufactured on trial basis as on 16th March, 1985, and none of them was in saleable condition. Since commercial production of motor-cycles commenced only on 27th May, 1985, expenditure cannot be allowed as deduction since business had not commenced. Tribunal, however, held that business had been set up as on 16th March, 1985, when trial production of 35 motor-cycles was completed and that expenditure incurred after such setting up of business was allowable as deduction, notwithstanding fact that commercial production had not commenced. 40. Taking into consideration findings of Tribunal for asst. yr. 1986-87, AO was of view that first year of production should be taken as having taken place in asst. yr. 1986-87 and, therefore, period of 10 years referred to in s. 80HH(4) ends with asst. yr. 1995-96 and, therefore, assessee will not be entitled to deduction under s. 80HH for present assessment year, viz., 1996-97. 4 1 . According to assessee, expression "beginning with assessment year relevant to previous year in which industrial undertaking begins to manufacture or produce articles" as used in s. 80HH(4) refers to only begins to manufacture or produce articles" as used in s. 80HH(4) refers to only manufacture of final product and not manufacture of trial product. Since final product was manufactured by assessee only on 27th May, 1985, previous year relevant to asst. yr. 1987-88 first year when deduction under s. 80HH could be claimed is only asst. yr. 1987-88 and, therefore, period of 10 years would end only with asst. yr. 1996-97, i.e., assessment year in present appeal and, therefore, assessee was entitled to claim deduction under s. 80HH in this year also. assessee explained that claim for deduction of revenue expenditure incurred after 16th March, 1985, when trial production of 35 motor-cycles had been completed in asst. yr. 1986-87 it was on basis that business was set up though business had not commenced. assessee pointed out difference between 'setting up' of business and 'commencement' of business as explained by Hon'ble Bombay High Court in case ofWestern India Vegetable Products vs. CIT (1954) 26 ITR 151 (Bom)as follows. In case of new business, accounting year commences on date when business is set up. business is set up when it is established or set on foot. There may be time-gap between setting up of business and commencement of business but under s. 28 of Act, chargeability of income to tax is in respect of business which is being carried on and under s. 29, only such chargeable income has to be computed in accordance with provisions of ss. 30 to 43D of IT Act. Expenditure incurred prior to setting up of business is not to be allowed. Expenditure incurred after setting up of business even though prior to commencement of business has to be allowed as deduction. 42. With aforesaid background, we shall now refer to case made out by AO for rejecting claim of assessee for deduction under s. 80HH of IT Act. AO has made reference to stand of assessee i n asst. yr. 1986-87 and was of view that having taken stand that production had commenced in previous year relevant to asst. yr. 1986-87, assessee was changing its stand in asst. yr. 1996-97 by saying that commercial production had commenced only in asst. yr. 1987-88 and period of 10 years has to be reckoned from that assessment year. He held that under s. 80HH there was no concept like 'commercial production'. He then made reference to directors' report in annual report of assessee for 1984-85 which was relevant to asst. yr. 1986-87, wherein directors have informed shareholders that flag off ceremony of trial production of CD 100 motor- cycles took place on 13th April, 1985, and commercial production of motor- cycles commenced on 27th May, 1985. According to AO, assessee did not choose to make claim for deduction under s. 80HH for asst. yr. 1986-87 because assessee had incurred loss. Deduction under s. 80HH would be available to assessee even if its trial production commenced and because there was loss in asst. yr. 1986-87, assessee did not claim deduction under s. 80HH. AO also made reference to claim of assessee for investment allowance as well as depreciation in asst. yr. 1986-87 and in his view, this was sufficient to prove that production has started in asst. yr. 1986- 87 itself. 4 3 . Aggrieved by order of AO, assessee preferred appeal before learned CIT(A). Before CIT(A), assessee primarily contended that it was only when commercial production commenced deduction under s. 80HH can be claimed. assessee relied on decision of Hon'ble Bombay High Court in case ofCIT vs. Hindustan Antibiotics Ltd. (1974) 93 ITR 548 (Bom)and decision of Hon'ble Madras High Court in case ofAddl. CIT vs. Southern Structurals Ltd. 1977 CTR (Mad) 279 : (1977) 110 ITR 1 6 4 (Mad),wherein while dealing with similar claim for deduction under analogous provisions of IT Act, Courts have taken view that it was only commercial production that was carried out in first year in which deduction was to be allowed and period when only trial production is carried out shall not be reckoned as first year of manufacture or production. expression 'manufacture or produce' was held by Courts to mean only 'commercial production'. assessee thereafter relied on circumstantial and other evidence to show that commercial production had in fact commenced only in previous year relevant to asst. yr. 1987-88. On such submissions, learned CIT(A) held as follows : (i) That in previous year relevant to asst. yr. 1986-87, assessee had only carried out trial production and not commercial production. (ii) That claim of assessee for deduction of revenue expenditure incurred by it after 16th March, 1985, when trial production of 35 motor-cycles was completed was on basis of distinction in law between 'setting up of business' and 'commencement of business' as explained in case ofWestern India Vegetable Products Ltd.(supra). Since carrying out of trial production was setting up of business claim of assessee was allowed. (iii) That different yardsticks were applied when claiming deduction under s. 80HH and that only when commercial production commences, claim for deduction under s. 80HH could be made. Since assessee commenced commercial production only on 27th May, 1985, (in) previous year relevant to asst. yr. 1987-88, (deduction) under s. 80HH could be acclaimed only in asst. yr. 1987-88. learned CIT(A) relied on decisions of Hon'ble Bombay and Madras High Courts in case ofHindustan Antibiotics(supra) andSouthern Structurals(supra) in this regard to come to conclusion that expression manufacture or production used in s. 80HH has to be interpreted as 'commercial production' and not trial production. (iv) learned CIT(A), therefore, concluded that first year of manufacture or production was previous year relevant to asst. yr. 1987-88 and, therefore, claim of assessee for deduction under s. 80HH for asst. yr. 1996-97, was 10th year and was, therefore, to be allowed. 44. Aggrieved by order of learned CIT(A), Revenue is in appeal before us. We have heard rival submissions. learned Departmental Representative in his submissions reiterated stand of AO. learned counsel for assessee again reiterated submissions as were made before learned CIT(A). As can be seen from ground of appeal of Revenue, what is challenged before us is not finding of learned CIT(A), that commercial production commenced only in previous year relevant to asst. yr. 1987-88 and that in previous year relevant to asst. yr. 1986-87, only trial production had commenced. only grievance of Revenue as projected in ground of appeal is that first year of manufacture is not first year of commercial manufacture or production, since such distinction is not contemplated by provisions of s. 80HH of IT Act. 45. provision of s. 80HH insofar as it is relevant for decision in present case reads as follows : 80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas . (1) Where gross total income of assessee includes any profits and gains derived from industrial undertaking, or business of hotel, to which this section applies, there shall, in accordance with and subject to provisions of this section, be allowed, in computing total income of assessee, deduction from such profits and gains of amount equal to twenty per cent thereof. (2) This section applies to any industrial undertaking which fulfils all following conditions, namely' (i) It has begun or begins to manufacture or produce articles after 31st day of December, 1970, but before 1st day of April, 1990, in any backward area; (ii) it is not formed by splitting up, or reconstruction, of business already in existence in any backward area : Provided that this condition shall not apply in respect of any industrial undertaking which is formed as result of re-establishment, reconstruction or revival by assessee of business of any such industrial undertaking as is referred to in s. 33B, in circumstances and within period specified in that section; (iii) it is not formed by transfer to new business of machinery or plant previously used for any purpose in any backward area; (iv) it employs ten or more workers in manufacturing process carried on with aid of power, or employs twenty or more workers in manufacturing process carried on without aid of power. Explanation : Where any machinery or plant or any part thereof previously used for any purpose in any backward area is transferred to new business in that area or in any other backward area and total value of machinery or plant or part so transferred does not exceed twenty per cent of total value of machinery or plant used in business, then, for purposes of cl. (iii) of this sub-section, condition specified therein shall be deemed to have been fulfilled. (4) deduction specified in sub-s. (1) shall be allowed in computing total income in respect of each of ten assessment years beginning with assessment year relevant to previous year, in which industrial undertaking begins to manufacture or produce articles or business of hotel starts functioning : Provided that,' (i) in case of industrial undertaking which has begun to manufacture or produce articles, and (ii) in case of business of hotel which has started functioning, after 31st day of December, 1970, but before 1st day of April, 1973, this sub-section shall have effect as if reference to ten assessment years were reference to ten assessment years as reduced by number of assessment years which expired before 1st day of April, 1974. 46. In case ofCIT vs. Hindustan Antibiotics Ltd.(supra), question for consideration before Hon'ble Bombay High Court arose in context of s. 15C of old Act, which reads as follows : "15C. (1) Save as otherwise hereinafter provided, tax shall not be payable by assessee on so much of profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent per annum on capital employed in undertaking computed in accordance with such rules as may be made in this behalf by Central Board of Revenue. (2) This section applies to any industrial undertaking which' (i) is not formed by splitting up, or reconstruction of business already in existence or by transfer to new business of building, machinery or plant used in business which was being carried on or before 1st day of April, 1948; (ii) has begun or begins to manufacture or produce articles in any part of taxable territories at any time within period of thirteen years from 1st day of April, 1948, or such further period as Central Government may, by notification in Official Gazette, specify with reference to any particular industrial undertaking; (iii) employs ten or more workers in manufacturing process carried on with aid of power, or employs twenty or more workers in manufacturing process carried on without aid of power : Provided that Central Government may, by notification in Official Gazette, direct that exemption conferred by this section shall not apply to any particular industrial undertaking... (6) provisions of this section shall apply to assessment for financial year next following previous year in which assessee begins to manufacture or produce articles and for four assessment years immediately succeeding." assessee was limited company, which on 1st June, 1954, took over project for manufacture of penicillin and other antibiotic products, which was initially started by Government of India. company commenced actual operations for manufacturing crude penicillin as from 12th Dec., 1954. In P&L a/c for year ending 31st March, 1955, it showed closing stock of crude penicillin worth Rs. 16,727. first samples of crude penicillin which were manufactured by assessee-company on 14th Dec., 1954, were required to be sent to USA and UK for obtaining certificates as to their qualities. requisite certificates were received sometime in June, 1955, and assessee- company started manufacture of sterile penicillin from August, 1955, onwards. ITO,inter alia, took view that it is not correct that assessee- company's actual manufacturing operations commenced w.e.f. August, 1955; that for accounting year ending 31st March, 1955 (the relevant year corresponding to asst. yr. 1955-56), company in its P&L a/c showed closing stock of crude penicillin worth Rs. 16,737. He took view that process of manufacture must certainly have commenced in accounting year 1954-55, as sales were effected in accounting year 1955-56. Further, he took view that beginning of manufacturing process was certainly in accounting year 1954-55, as balance sheet and P&L a/c for year ending 31st March, 1955, showed that substantial quantity of raw materials n d stores were consumed, wages were paid and electricity charges were incurred. In appeal by assessee, AAC reversed order of ITO and held that assessee-company was entitled to exemption under s. 15C of Act for asst. yr. 1960-61 also. On further appeal by Revenue before Tribunal, it was held that regular production of end-product commenced only in August, 1956, relevant to asst. yr. 1956-57 and that mere production of crude penicillin, which until final certificate as to quality was received, may not be regarded as of any use, and cannot be regarded as beginning of manufacture or production of article. On further appeal by Revenue, Hon'ble Bombay High Court held as follows : "The question that arises for consideration in this case depends upon correct interpretation of expression 'has begun or begins to manufacture or produce articles' used in s. 15C(2)(ii). first question that arises for consideration will be whether mere trial production will be regarded as beginning to manufacture or produce articles. On behalf of Revenue, counsel has not contended to that extent, but his submission, however, is that before finished product is produced by assessee-company, it is necessary to produce some other product at earlier stage, mere production of that material at earlier stage will be sufficient to come to conclusion that assessee-company had begun or begins to manufacture or produce articles. Reliance was placed by him upon two facts which are not disputed, namely, that assessee-company commenced production or manufacture of crude penicillin on 14th Dec., 1954, and that in P&L a/c for period ending 31st March, 1955, there was closing stock of crude penicillin worth Rs. 16,727. argument was that sterile penicillin, which is final product saleable in market can never be produced until first crude penicillin is produced or manufactured and if that be so, mere production or manufacture of crude penicillin will be regarded as beginning of manufacture or production of articles within meaning of s. 15C(2)(ii). word "articles" used in this expression has to be interpreted regard being had to object with which this section was enacted. Undoubtedly, object was to encourage establishment of new industrial undertakings and such object was sought to be achieved by granting exemption from tax to extent of 6 per cent per annum on capital employed in undertaking in manner prescribed. If object is to give exemption from tax, that presupposes that real object is that profits are capable of being earned by company. If such be object, then until assessee-company reaches stage where it is in position to decide that final product, which could ultimately be sold in market, could be manufactured or produced by it, it will be idle formality to say that it had started manufacture or production of articles simply because trial products are prepared with view to verify whether they can be ultimately used in preparation or manufacture of final products. It is undoubtedly true that commencement of operations for manufacture of crude penicillin took place on 14th Dec., 1954, and there was some closing stock of crude penicillin at end of March, 1955, but even assessee-company itself did not know whether crude penicillin manufactured or produced by it would at all be useful to them for production or manufacture of sterile penicillin which is only saleable product in market. Facilities for testing crude penicillin are not available in this country and samples were required to be sent to USA and UK with view to find out its quality. It was only in month of June, 1955, that certificate as to quality of crude penicillin was received by assessee-company and regular production was thereafter commenced only from and after August, 1955. If, on testing, crude penicillin, which was sent for certificate, was found useless, it will be difficult to take view that assessee-company has begun to manufacture or produce articles, meaning thereby, articles which will ultimately be useful for manufacturing or producing finished products with object of selling for which assessee-company was incorporated. In our view, if regard be had to object with which section was enacted, then word "articles" in s. 15C(2)(ii) can only be interpreted to mean articles which are definitely capable of being used by assessee-company for manufacture or production of finished things which are to be ultimately sold by company. Such thing took place for first time from and after August, 1955, and so benefit of exemption under s. 15C arose to assessee-company for first time in asst. yr. 1956-57, for which relevant accounting year ended on 31st March, 1956. provisions of sub-s. (6) lay down that they will apply to assessment for financial year next following previous year in which assessee begins to manufacture or produce articles and for four assessments immediately succeeding. first financial year in respect of which benefit of section is available being 1956-57, company was entitled to claim exemption also for asst. yr. 1960-61, as four years succeeding ended in that period." 47. In case ofAddl. CIT vs. Southern Structurals Ltd.(supra), facts were that assessee entered into contract with Government of India, Ministry of Railways, to manufacture and deliver 250 railway wagons at specified price. Being new industrial undertaking, assessee claimed relief under s. 84 of IT Act, 1961. We may mention here that this section is identical to provisions of s. 15C of old Act referred to in decision of Bombay High Court in case ofHindustan Antibiotics Ltd.(supra). assessee was granted relief under s. 84 of IT Act upto asst. yr. 1963-64. When question of availability of relief to assessee came up for consideration for asst. yr. 1964-65, ITO took view that manufacture of railway wagons had begun in calendar year 1958, relevant for asst. yr. 1959-60, and that last and final year of relief could only be 1963-64, and that, therefore, assessee was not entitled to relief for asst. yr. 1964-65. Against this order of ITO, assessee appealed to AAC who upheld finding of ITO and rejected assessee's claim for relief. assessee thereafter took matter in appeal to Tribunal. Tribunal held that assessee was eligible for relief for asst. yr. 1964-65, as assessee could not be said to have begun manufacturing or producing railway wagons in any commercial sense in calendar year 1958, relevant for asst. yr. 1959-60. On further appeal by Revenue, Court held as follows : "There can be no dispute about fact that article that is relevant in context of present case is wagon as such. Production of prototype is not production of article as such, because if Ministry of Railways had rejected prototype or had suggested substantial modifications thereto, then it would not have been possible for assessee to go into production of wagons in accordance with prototype already produced and process of manufacture in accordance with rectified type of wagon would take some further time. Therefore, mere manufacture of prototype would not be enough to show that assessee had begun to manufacture or produce articles. manufacture or production of articles must be in some commercial sense." 48. principles laid down in aforesaid decisions squarely apply to provisions of s. 80HH and, therefore, CIT(A) was fully justified in holding that first year in which deduction under s. 80HH was available is year in which commercial production had commenced. claim of assessee in asst. yr. 1986-87 was allowed on basis of principles laid down by Hon'ble Bombay High Court in case ofWestern India Vegetable Products Ltd.(supra). first thing which one will have to bear in mind is that there is distinction between setting up of business and commencement of business. InWestern India Vegetable Products Ltd. vs. CIT(supra), it has been held that under IT Act, what is relevant is setting up of business and not commencement of business that is to be considered. definition of previous year as contained in s. 3 of IT Act, 1961, reads as follows : 3. "Previous year" defined.' For purposes of this Act, "previous year" means financial year immediately preceding assessment year : Provided that, in case of business or profession newly set up, or source of income newly coming into existence, in said financial year, previous year shall be period beginning with date of setting up of business or profession or, as case may be, date on which source of income newly comes into existence and ending with said financial year. 49. It is on basis of this definition that Hon'ble Bombay High Court held that for purpose of Indian IT Act, it is setting up of business and not commencement of business that is to be considered. Hon'ble High Court further held that when business is established and ready to commence business, then it cannot be said that business itself is set up but before it is ready to commence, it is not set up. It further held that there may be time-gap in setting up of business and commencement of business and all expenses incurred during that intervening period would be permissible deduction. It is on basis of this principle that deduction for revenue expenditure in asst. yr. 1986-87 had been allowed to assessee in present case. That will however, have no bearing on issue in present assessment year which revolves around question as to when commercial production commenced in case of assessee. In view of finding that commercial production commenced in case of assessee only in asst. yr. 1987-88, claim for deduction under s. 80HH in asst. yr. 1996-97 was to be allowed. 50. following facts would go to show that only trial production had started on 16th March, 1985, during previous year relevant to asst. yr. 1986-87. commercial production began only on 27th May, 1985, falling in asst. yr. 1987-88. directors' report to shareholders and notes to accounts forming part of annual report for financial year 1984-85 would go to show that commercial production of motor-cycles commenced only on 27th May, 1985. copy of annual report for year ending is placed at page Nos. 368 to 370 of assessee's paper book. At p. 359, is directors' report to shareholders wherein above fact has been informed by directors to shareholders. In notes to accounts to said annual report, there is reference to raw materials and components consumed during trial production as per note No. 4 of notes to accounts (p. 360 of paper book), in note Nos. 10 to 12 of notes to accounts (p. 370 of paper book), fact that trial production commenced on 16th March, 1985, and fact that commercial production did not commence as on 30th April, 1985 (date of balance sheet) is also mentioned therein. expenditure incurred on production during period from March, 1985, to 30th April, 1985, has been shown as preoperative and trial production expenditure allocated to fixed assets and capital work-in-progress. auditors in their report to shareholders (copy at p. 361 attached to paper book) have also reported to shareholders that no commercial production has started as on 30th April, 1985. copy of annual report for year 1985-86 has also been filed before us. Copy of same is at page Nos. 371 to 374 of assessee's paper book. In this annual report for period ending 30th June, 1985, it has been reported by directors' that commercial production of motor-cycles began only from 1st May, 1985, to 30th June, 1986 (page No. 372 of assessee's paper book). In notes of accounts (at p. 392 of assessee's paper book), fact that commercial production began only on 27th May, 1985, has been stated. In year of assessment for year 1986-87, AO has recorded fact that commercial production of assessee began only on 27th May, 1985. first sale of motor-cycles had taken place on 27th May, 1985, and sales- tax return disclosing sales made and return to excise authorities in RT-12 disclosing production of motor-cycles was filed first time on 27th May, 1985. copy of sales-tax return for month of June, 1985, is at pp. 69 to 75 of assessee's paper book. Copy of excise return for month of March, 1985, is at pp. 76 to 83 of assessee's paper book. In light of these documents, findings of learned CIT(A) that commercial production began only on 27th May, 1985, is correct. In view of above, order of CIT(A) does not call for any interference and same is confirmed and this ground of appeal of Revenue is dismissed. 51. Ground No. 2 of grounds of appeal of Revenue reads as follows : 2. That on facts and in circumstances of case, learned CIT(A) has erred in deleting disallowance of provisions for warranty without appreciating facts that it is not incurred expenditure. 52. assessee-company is in business of manufacture and sale of motor-cycles. For every motor-cycle sold, assessee provides warranty to purchaser against any manufacturing defects in certain specific component of motor-cycle. warranty so provided was for following period : (a) On components of CD 100 series of motor-cycles'6 months (b) On frame of Splendor model of motor-cycles'6 months (c) On engine components of Splendor model'6 months assessee had claimed sum of Rs. 28,70,416 as deduction on account of provisions of warranty. assessee during relevant previous year changed its method of accounting for warranty from cash to mercantile system. According to assessee, this change in method of accounting became necessary in view of amendments to provision of s. 209(3) of Companies Act, 1956, whereby assessee was required to follow accrual system of accounting. assessee also made reference to opinion of Institute of Chartered Accountants of India, whereby they have opined that it was mandatory to provide warranty cost on accrual basis. According to assessee, change in method of accounting and provision made was based on number of motor-cycles sold in particular year and actual claims on motor-cycles sold in past. provision was made on basis of weighted average of actual claim of motor-cycles in past. assessee also enclosed basis of calculation of provisions for warranty. AO, however, was of view that expenditure in question can be allowed only on actual accrual basis and since purchaser of motor-cycle had not made claim for rectification of defects, it cannot be said that liability had accrued to assessee. AO referred to several cases in this regard and disallowed claim of deduction. Aggrieved by order of AO, assessee preferred appeal before learned CIT(A). Before learned CIT(A), assessee has contended as follows : (a) That during previous year, relevant to asst. yr. 1996-97, assessee changed its method of accounting in matter of providing for claim on account of warranties on vehicles that it had sold from cash basis to mercantile basis. (b) That sum of Rs. 28,70,416 was set aside as provision for meeting claims on account of warranties and that this provision was worked out on basis of weighted average of actual claims settled during year. (c) That change in method of accounting was necessary because of prescription by ICAI to provide for warranty for actual (sic-accrual) basis and also on account of mandate of law (under Companies Act) to follow accrual system of accounting. assessee had explained that as against provision made during previous year, assessee had actually settled sum of Rs. 51,23,558. (d) That it had been following consistently system of providing warranty claims, details of which are as follows : Financial Warranty provided Warranty paid year (Rs.) (Rs.) 1995-96 28,70,415.80 51,23,557.82 1996-97 61,29,755.04 62,49,035.55 1997-98 81,86,166.41 82,75,034.43 1998-99 1,05,08,413.17 83,94,808.35 (e) That changed method of accounting did reflect true profits of assessee inasmuch as all cost of warranty claims was included in sales price, but, liability thereagainst was not claimed in P&L a/c. That method of accounting followed by assessee was more scientific and based on actual claims for specific period and that AO has not established that better method would have been followed by assessee. 5 3 . learned CIT(A), on consideration of submission of assessee, was of view that assessee was following cash system of accounting in respect of claim for warranties which was logical and realistic in determining correct income. But, such system of accounting could not be followed by assessee, since as per Companies Act, assessee was statutorily required to follow mercantile system of accounting. He also was of view, that even hybrid system of accounting could not be followed by assessee, because law requires assessee to either follow cash system of accounting or mercantile system of accounting. learned CIT(A), thereafter considered system of determining provisions for warranties as adopted by assessee and was of view that provision is made by assessee every year and actual expenses incurred every year are also been debited in P&L a/c. similar provision has been made every year and there was consistency. He was of view that claim of assessee deserves to be accepted. He, however, directed AO to verify that provision is credited and also actual expenses are debited and to ensure that provision is not debited over and above actuals. According to CIT(A), expenses in each year are not less than what has been provided for by assessee and, therefore, he held that claim of assessee deserves to be allowed. 54. Aggrieved by order of learned CIT(A), Revenue is in appeal before us. We have heard submissions of learned Departmental Representative who principally relied on reasoning adopted by AO. learned counsel for assessee while relying on order of learned CIT(A) and submissions made before learned CIT(A), submitted that claim of assessee has been found to be consistent, scientific and logical and, therefore, same was rightly upheld by learned CIT(A). 55. We have considered rival submissions. assessee follows mercantile system of accounting. It is only actual liability which accrues or arises during previous year that can be considered as expenditure deductible for income-tax purposes. liability which is dependent on fulfilment of condition cannot be allowed as deduction unless dependent condition is fulfilled during previous year. In present case, it is noticed that assessee, when it sells its motor-cycles manufactured by it, confers on purchasers benefit of warranty against defects appearing within particular period. assessee also undertakes to provide free maintenance including replacement of parts within particular period from date of sale of motor-cycle. It estimated its probable liability on account of free maintenance and replacement of parts during warranty period and claimed same as deduction. According to Revenue authorities, liability was contingent upon defect appearing and being notified within warranty period. Till such time there is no liability in law and, therefore, claim for deduction on account of estimated liability cannot be allowed. Hon'ble Supreme Court in case ofBharat Earth Movers(supra) had occasion to consider claim for deduction on account of contingent liability. following principles were laid deduction on account of contingent liability. following principles were laid down by Hon'ble Supreme Court : 'If business liability has definitely arisen in accounting year, deduction should be allowed although liability may have to be quantified and discharged at future date. What should be certain is incurring of liability. It should also be capable of being estimated with reasonable certainty though actual quantification may not be possible; if these requirements are satisfied liability is not as contingent one. liability is in present though it will be discharged at future date. It does not make any difference if future date on which liability shall have to be discharged is not certain'. Similarly, in case ofIRC vs. Mitsubishi Motors New Zealand Ltd.(1996) 222 ITR 697 (PC), Privy Council had occasion to deal with claim for deduction on account of anticipated liability under warranty. It was case of car manufacturer who had undertaken to repair defects appearing within one year of delivery or until vehicle has been driven for 22,000 kms., whichever period is shorter. assessee, car manufacturer, sought deduction of its anticipated liability under warranty remaining unexpired at end of year in which vehicles were sold. Privy Council held as follows : 'The taxpayers' liability under warranty for each vehicle sold was contingent on defect appearing and being notified to dealer within warranty period so that no liability was incurred by taxpayer until those conditions were satisfied, regard could be had to its estimation of warranty claims based on statistical information, which shows that as matter of existing fact, not future contingency, 63 per cent of all vehicles sold by taxpayer contained defects likely to be manifested within warranty, that since theoretical contingencies could be disregarded, taxpayer was in year of sale under accrued legal obligation to make payment under those warranties and, even though it might not be required to do so until following year, it was definitively committed in year of sale to that expenditure; and that, accordingly, in computing profits or gains derived by taxpayer from its business in year in which vehicles were sold, taxpayer was entitled under s. 104 to deduct from its total income and provision which it had made for costs to its anticipated liabilities under outstanding warranties in respect of vehicles sold in that year'. 56. Keeping in mind principles laid down by Hon'ble Supreme Court and also by Hon'ble Privy Council, we shall now examine facts of present case. In present case, year-wise details of provision for warranty and actual payments for subsequent year against it are as follows : Financial Warranty provided Warranty paid year (Rs.) (Rs.) 1995-96 28,70,415.80 51,23,557.82 1996-97 61,29,755.04 62,49,035.55 1997-98 81,86,166.41 82,75,034.43 1998-99 1,05,08,413.17 83,94,808.35 learned CIT(A), on analysis of method of making provisions for warranty has held, actual expenses are being debited every year and similar basis for making provisions is repeated every year. system followed by assessee is consistent. expenses actually incurred for previous year and provided for are not less than actual expenses. Since method of accounting is scientific and results in correct determination of profits, we are of view that order of learned CIT(A) is just and proper and does not call for any interference and same is, therefore, confirmed. Hence, this ground of appeal of Revenue is dismissed. 57. third ground of appeal has already been decided while deciding first ground of appeal of assessee for reasons stated therein. Hence, this ground of appeal of Revenue is dismissed. 58. fourth ground of appeal of Revenue reads as follows : 4. That on facts and in circumstances of case, learned CIT(A) has erred in deleting disallowance as to presentation of articles without considering facts that presentation of articles are not in nature of advertisement. 59. During previous year, assessee had incurred expenditure of Rs. 25,93,750 on presentation of articles. Out of this amount, sum of Rs. 21,93,750 was spent on refrigerators presented to dealers for achieving target under incentive scheme of company. remaining sum was incurred on articles presented to business associates in usual course of business. assessee also submitted that none of articles presented carried name, logo of assessee and, therefore, they could not be considered as having any advertisement value and consequently, r. 6B also did not apply. According to assessee, aforesaid expenditure was incurred for purpose of business to boost its sale and maintain its relationship with its business associates and was wholly and exclusively for purpose of business of company and was eligible for deduction under s. 37(1) of IT Act. AO, however, held that even though there is no logo printed or embossed on articles presented, same would always be presented with visiting cards of employees of company. AO was, therefore, of view that it had advertisement value and accordingly, disallowed sum of Rs. 21,93,750 incurred as expenditure on presentation of refrigerators to dealers. On appeal by t h e assessee, learned CIT(A) deleted addition holding that expenditure was only incentive to dealers to boost sales of company and expenditure so incurred was wholly and exclusively for purpose of business. Aggrieved by order of learned CIT(A), Revenue is in appeal before us. 6 0 . We have heard rival submissions of learned Departmental Representative who relied on order of AO. learned counsel for assessee relied on order of learned CIT(A) and submissions made before learned CIT(A). We have considered rival submissions. There is no dispute in present case that articles in question had been presented to its dealers. Merely because refrigerators are presented along with visiting cards will not make it advertisement. dealer knows about assessee n d its products and there is no occasion for assessee to advertise its products to its own dealers. expenditure was rightly considered by learned CIT(A) to be incentive to dealers to boost sale of company and that it was wholly and exclusively related to business of assessee. following case law support view taken by learned CIT(A) : (i)Dy. CIT vs. Bhagwandas Shobalal Jain (1997) 57 TTJ (Jab) 379 : (1997) 60 ITD 118 (Jab) (ii)Panama Industries & Laboratories vs. IAC (1991) 42 TTJ (Bom) 64 : (1991) 38 ITD 80 (Bom) (iii)Asstt. CIT vs. Hindustan Marketing & Advertising Co. Ltd. (1994) 49 TTJ (Del) 96 (iv)Avon Cycles Ltd. vs. Asstt. CIT (1997) 59 TTJ (Chd) 75 (v)Aristocrat Marketing Ltd. vs. Asstt. CIT (1996) 85 Taxman 236 (Bom)(Mag) This ground of Revenue is, therefore, dismissed. 61. 5th ground of Revenue reads as follows : 5. That on facts and in circumstances of case, learned CIT(A) has erred in allowing relief of Rs. 1,34,191 in respect of R&D expenditure. 6 2 . assessee during relevant previous year, incurred capital expenditure amounting to Rs. 79,12,181 on research and development and claimed same as business expenditure under s. 35(1)(iv) of Act. AO, however, disallowed part of expenditure amounting to Rs. 1,34,191 on basis that same has not actually been paid during year. amount of Rs. 1,34,191 disallowed by AO had been paid in advance by assessee to extent of Rs. 1,23,691 during financial year 1994-95, balance amount of Rs. 11,500 was paid during financial year 1997-98. expenditure has been claimed as deduction in relevant previous year on plant and machinery being capitalised and used for scientific research during relevant previous year. On appeal, learned CIT(A) deleted disallowance made by AO. Aggrieved by order of learned CIT(A), Revenue is in appeal before us. learned Departmental Representative relied on order of AO. learned counsel for assessee relied on order of learned CIT(A). We have considered rival submissions. Under provisions of s. 35, sub-s. (1)(iv) it is not necessary that assessee must have actually paid a m o u n t expended as expenditure on scientific research before claiming deduction. Under provision of s. 35(2)(ia) of IT Act, requirement is that assessee should have incurred capital expenditure after 31st March, 1967. assessee, in present case, follows mercantile system of accounting and liability in question had been incurred during previous year, relevant to asst. yr. 1996-97. In such circumstances, we find no ground to interfere with order of learned CIT(A), and same is, therefore, confirmed and this ground of Revenue is also dismissed. 63. 6th ground of Revenue reads as follows : 6. That on facts and in circumstances of case, learned CIT(A) has erred in deleting disallowance under s. 43B without granting opportunity to AO as per r. 46A of IT Rules. 64. assessee had collected Rs. 3,74,824 as Haryana general sales- tax on work contracts given by assessee-company. said sum was outstanding as on 31st March, 1996, but paid before due date of filing return. In tax audit report, fact that payment has been made has been mentioned and proof of payment was also attached along with return of income. AO, ignoring evidence on record, inadvertently disallowed said amount by invoking provisions of s. 43B of Act. CIT(A) deleted addition made by AO by holding that necessary evidence for payment of sales-tax before due date for filing return of income had been furnished along with return of income. Revenue is aggrieved and has raised present ground of appeal. We have heard rival submissions. perusal of order of learned CIT(A) shows that assessee had filed before learned CIT(A) necessary evidence to establish fact that sales-tax had been paid before due date for filing of return of income had been duly disclosed in tax audit report. Proof of payments had also been filed along with return of income. In view of above, amount was allowable as deduction in view of first proviso to s. 43B of IT Act. learned CIT(A) was, therefore, justified in allowing same. order of learned CIT(A) is, therefore, confirmed and this ground of Revenue is dismissed. 65. 7th ground of appeal of Revenue has already been decided while deciding connected ground of appeal of assessee. For reasons stated therein, 7th ground of appeal of Revenue is dismissed. 66. In result, appeal filed by Revenue is partly allowed. *** HERO HONDA MOTORS LTD. v. JOINT COMMISSIONER OF INCOME TAX