Holding

Bottling fees and interest payable under the Rajasthan Excise Act are not taxes, duties, cesses or fees, and a bank guarantee does not constitute actual payment; therefore Section 438 does not apply and the deduction is permissible.

Summary

The case involved McDowell & Co. Ltd. challenging the revenue's disallowance of deductions under Section 438 of the Income Tax Act, 1961, relating to unpaid bottling fees and interest secured by a bank guarantee, and other claims such as depreciation on R&D assets, transformer purchase, and technical service charges. The Supreme Court held that bottling fees under the Rajasthan Excise Act are consideration for a privilege, not a tax, duty, cess or fee, and that a bank guarantee does not constitute actual payment. Consequently, Section 438 does not apply, allowing the deduction. The Court also remitted the issues of depreciation on R&D machinery and transformer expenditure to the Assessing Officer for factual determination, and upheld the revenue's position on technical service charges. The revenue's appeal was dismissed.

Issues considered

Whether furnishing a bank guarantee for unpaid bottling fees amounts to actual payment for purposes of Section 438, Income Tax Act, 1961.
Whether bottling fees and interest under the Rajasthan Excise Act, 1950, constitute "tax, duty, cess or fee" within the meaning of Section 438.
Whether depreciation on research and development assets of a closed fast‑food division is allowable.
Whether expenditure on a new transformer, while the old transformer remains in the block of assets, is capital in nature and deductible.
Whether technical service (royalty) charges under a revised agreement are allowable deductions.

Legislation cited

Income Tax Act, 1961s. 31, s. 35(1)(iv), s. 37, s. 438, s. 43B

Subjects

Section 438Income Tax ActBottling feeBank guaranteeTax deductionDepreciationResearch and developmentTransformer expenditureTechnical service chargesRajasthan Excise Act

Judgment

!;

[2009] 8 S.C.R. 983

'· )'
COMMISSIONER OF INCOME TAX, UDAIPUR, A
RAJAS THAN
V.
MCDOWELL & CO. LTD.
(Civil Appeal No.2939 of 2006)
B
MAY 8, 2009
If )(
[DR. ARIJIT PASAYAT AND DR. MUKUNDAKAM
SHARMA, JJ.]

Income Tax Act, 1961: c
s.438 - Unpaid amount of bottling fee on furnishing of
thei bank guarantee, not to be treated as actual payment and
not entitled to deduction u/s.438.
. "l Bottling fees chargeable from assessee under the Rules
D
frnmed under the Rajasthan Excise Act and interest
chargeable on late payment of bottling fees does not amount
to tax, duty, cess or fees within the meaning s.438.

Depreciation on research and development assets which E
related to the closed business of fast food division/unit of the
.../ as.sessee-company and as such not used during the previous
)
year - Entitlement to deduction - Held: Issue whether
machinery was used in respect of both the fast food and liquor
units was not examined in detail - Matter remitted to F
assessing officer to examine this aspect - If it is established
that whole or part of machinery was used for liquor unit whether
partly or fully in respect of those machineries the deduction
can be made as permissible in law.
G
.,; '~ Expenditure incurred in purchase of new transformer
even when the old transformer still existed in the blocks of
asset and not sold, discarded or demolished or destroyed -
Entitlement to deduction - Held: Tribunal and High Court· did
983 H
984 SUPREME COURT REPORTS [2009) 8 S.C.R.

J
A not deal with factual aspects in detail - Matter remitted to
Assessing Officer. ""
Technical service charges payment under consideration
whether allowable based on subsequent agreement at higher
B rate - Held: Tribunal and High Court recorded a finding that
new agreement was not clandestine device to reduce the tax
liability but was an expenditure incurred on business
Jo(" ,.
expediency and decision of parties to enter into agreement
was based on commercial consideration - Such finding was
c finding
for.
of fact on cogent assessment - No interference called

Amar Chandra v. Collector of Excise, Tripura AIR (1972)
SC 1863; Housing Board of Haryana v. Haryana AIR (1996)
SC 434; State of Bombay v. F.N. Balsara AIR (1951) SC 318;
D Har Shankar v. Dy. Excise and Taxation Commissioner AIR ~ " ~-
(1975) SC 1121; State of U.P. v. Sheopat Rai AIR (1994) SC
813; Ahmedabad Urban Development Authority v. Sharad
Kumar Jayantgi Kumar Pasawalla AIR (1992) SC 2038;
Commissioner of Income Tax v. Ramaraju Surgical Cotton
E Mills (2007) 294 ITR 328 SC, relied on.

Commissioner of Income Tax, Madurai and Ors. v.
\...
Saravana Spinning Mills (P) Ltd. (2007) 7 SCC 298; ~

Commissioner of Income Tax v. Rajasthan Patrika Ltd. 258
F -ITR 300, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
2939 of 2006.

From the Judgment & Order dated 09.10.2003 of the High
G Court of Rajasthan at Jodhpur in I. T. A. 77 of 2001.
.__ ....
With

C.A. No. 3471, 3472, 3473, 3511, 3512 of 2007.
H
\
COMMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 985
v. MCDOWELL & CO. LTD.
p
. P.V. Shetty, H. Raghvendra Rao, Ashish Jain, B.V. A
" Balaram Das and B.K. Prasad for the Appellants.

S. Ganesh, Anjali K. Verma, Neeraj Gupta and Meera
Mathur for the Respondents.

The Judgment of the Court was delivered by B

..- i. DR. ARIJIT PASAYAT, J. 1. Questioning correctness of
the judgment rendered by a Division Bench of the Rajasthan
High Court at Jodhpur this appeal has been filed. Originally
following questions were framed for adjudication by order dated c
24.fi.2002:

1. Whether on the facts and in the circumstances of
the case, the ITAT was justified in deleting the addition of
Rs.5,61,462/- by holding that unpaid amount of bottling fee
: > j_ D
has, on furnishing of bank guarantee, to be treated as
actual payment and accordingly the deduction in respect
of the same cannot be deemed under section 438 of the
IT Act, 1961?

2. Whether, on the facts and in the circumstances of E
the case, the ITAT was justified in deleting the addition of
Rs.61,412 made by the Assessing Officer on account of
-+
,) disallowance of landscaping expenses not recovered u/s
Section 35(1}(iv) of the Income Tax Act by wrongly relying
on the decision in ITA No.1546/JP95 dtd. 30.03.2001 ?" F

2. Subsequently a third question was framed which reads
as follows:

3. "Whether, in the facts and circumstances of the
G
case; bottling fees chargeable from the assessee under
; -~ the Rules framed under the Rajasthan Excise Act, 1950.
and interest chargeable on late payment of bottling fees,
amounts to tax, duty, cess or fees within the meaning of
Section 438 of IT Act, 1961, so as to attract the said
H
,...'
986 SUPREME COURT REPORTS [2009] 8 S.C.R.

~
)i
A provisions while considering allowability of deduction of
such expenses."

3. The first dispute in essence related to the applicability
of Section 438 of the Income Tax Act, 1961 (in short the 'Act')
B The High Court held that the said provision has no application.
4. The second questior. was decided in favour of the
revenue so far as it relates landscaping expenses. That has
~ ..
become final.

c 5. The dispute relates to assessment year 1988-89. The
question arose in the background of the view Assessing Officer
as well as the Commissioner of Income Tax (Appeals), Jodhpur
(in short 'Commissioner') that the assessee was not entitled
to deductions in terms of Section 438 of the Act. The amount
D in question rEilated to payability of excise duty on wastages. The > ..
assessee took the stand that the provision for excise duty made
on wastage of IMFL in transit which is debited to the customers
account and credited to this account does not bring in
application of Section 438 of the Act. The Income Tax Officer
E as well as the Commissioner held that the assessee's stand
was not acceptable. An appeal was filed before the Income-
tax Appellate Tribunal, Jodhpur Bench, Jodhpur (in short 'ITAT') ._
which decided the issues in favour of the assessee.
'
6. Before the High Court the assessee took the stand that
F
a bank guarantee has been furnished in respect of the amount
and, therefore, there was no scope for applying Section 438
of the Act. It was also submitted that Section 438 of the Act
applies to payments relatable to tax, duty, cess, or fee. But
bottling fees chargeable from the assessee under the Rajasthan
G Excise Act, 1950 (in short the 'Excise Act') and Rajasthan
Excise Rules, 1962 (in short the 'Rules') and the interest
._ - .
chargeable for late payment of Rs.40,000/- does not amount
to tax, duty and cess. The High Court held that such fees are
not covered under the ambit of Section 438.
H
COMMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 987
v. MCDOWELL & CO. LTD. [DR. ARIJIT PASAYAT, J.]
,. )<
"1. The revenue is in appeal against the said view of the A
High Court which nevertheless held that furnishing of bank
guarantee is not the same as making payment as stipulated in
Section 438 of the Act.

B. We shall first deal with the question whether furnishing 8
of bank guarantee amounts to actual payment and fulfils the
i ,. conditions stipulated in section 438 of the Act. The requirement
of Sectio~ 438 of the Act is the actual payment and not
deemed payment as condition precedent for making the claim ·
for deduction in respect of any of the expenditure incurred by
the assessee during the relevant previous year specified in
c
Section 438. The furnishing of bank guarantee cannot be
equated with actual payment which requires that money must

. ...
flow from the assessee to the public exchequer as required
under Section 438. By no stretch of imagination it can be said
that furnishing of bank guarantee is actual payment of tax or
D
duty in cash. The bank guarantee is nothing but a guarantee
for payment on some happening and that cannot be actual
payment as required under Section 438 of Act for allowance
as dE!duction in the computation of profits. Section 438 after
E
amendment w.e.f. 1.4.1989 refers to any sum payable by
assessee by way of tax, duty or fee by whatever name called
-+ under any law for the time being in force. The basic
.J
requirement, therefore, is that the amount payable must be by
way of tax, duty 'and cess under any law for the time being in
F
force. The bottling fees for acquiring a right of bottling of IMFL
which is determined under the Excise Act and Rule 69 of the
Rules is payable by the assessee as consideration for acquiring
the exclusive privilege. It is neither fee nor tax but the
consideration for grant of approval by the Government as terms
~ __. of contract in exercise of its rights to enter a contract in respect G
of the exclusive right to deal in bottling liqµor in all its
manifestations.

9. Section 438 as it stood on 1.4.1989 reads as follows:
H
988 SUPREME COURT REPORTS [2009] 8 S.C.R.
~

A "438. Certain deductions to be only on actual payment-· "
Notwithstanding anything contained in any other provision
of this Act, a deduction otherwise allowable under this Act
in respect of -

B (a) any sum payable by the assessee by way of tax, duty,
cess or fee, by whatever name called, under any law for
the time being in force, or ... ...

(b) any sum payable by the assessee as an employer by
way of contribution to any provident fund or superannuation
c fund or gratuity fund or any other fund for the welfare of
employees, or

(c) any sum referred to in Clause (ii) of Sub-section (1) of
Section 36; or
D
>- •
(d) any sum payable by the assessee as interest on any
loan or borrowing from any public financial institution or a
State Financial Corporation or a State Industrial Investment
Corporation, in accordance with the terms and conditions
of the agreement governing such loan or borrowing, or
E
(e) any sum payable by the assessee as interest on any
~
term loan from a scheduled bank in accordance with the
'-
terms and conditions of the agreement governing such
loan or advances, or
F
(f) any sum payable by the assessee as an employer in
lieu of any leave at the credit of his employee,

shall be allowed irrespective of the previous year in which
the liability to pay such sum was incurred by the assessee
G
according to the method of accounting regularly employed t.- ~
by him only in computing the income referred to in Section
28 of that previous year in which such sum is actually paid
by him:
H Provided that nothing contained in this section shall
COMMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 989
v. MCDOWELL & CO. LTD. [DR. ARIJIT PASAYAT, J.]
' .
" )i
apply in relation to any sum referred to in Clause (a) or A
..... Clause (c) or Clause (d) or Clause (e) or Clause (f) which
is actually paid by the assessee on or before the due date
applicable in his case for furnishing the return of income
under Sub-section (1) of Section 139 in respect of the
previous year in which the liability to pay such sum was 8
incurred as aforesaid and the evidence of such payment
,. :..: is furnished by the assessee along with such return."

10. It would be pertinent to note that the expression now
used in Section 438 (i)(a) is "Tax, Duty, C~ss or fee or by
whatever name called". It denotes that items enumerated
c

-
~ ~
con_stitute species of the same genus and the expression 'by
whatever name called' which follows preceding words 'Tax',
'Duty', 'Cess' or 'fee' has been used ejusdem generis to confine
the application of the provisions not on the basis of mere
D
nomenclatures, but notwithst,,nding name, they must fall within
the genus 'taxation' to which expression 'Tax', 'Duty', 'Cess' or
'Fee' as a. group of its specie belong vis. compulsory exaction
in the exercise of State's power of taxation where levy and
collection is duly authorised by law as distinct from amount
E
chargeable on principle as consideration payable under
contract.
/
~
11. The principle of statutory interpretation is well known
and well settled that when particular words pertaining to a class,
category or genus are followed by general words, the general F
words are construed as limited to things of the same kind as
those specified. This rule is known as the rule of ejusdem
generic. It applies when:
(1) the statute contains an enumeration of specific
., G
--~ words;
(2) the subjects of enumeration constitute a class or
category;
(3) that class or category is not exhausted by the H
990 SUPREME COURT REPORTS [2009) 8 S.C.R.

,..
A enumeration; "
.r
(4) the general terms follow the enumeration; and
(5) there is no indication of a different legislative intent.

B 12. Reference in this connection may be made to Amar
Chandra v. Collector of Excise, Tripura {AIR 1972 SC 1863)
and Housing Board of Haryana v. Haryana (AIR 1996 SC
434)
;.,. .
13. The 'Tax', 'Duty', 'Cess' or 'fee' constituting a class
c denotes to various kinds of imposts by State in its sovereign
power of taxation to raise revenue for the State. Within the
expression of each specie each expression denotes different
kind of impost depending on the purpose for which they are
levied. This power can be exercised in any of its manifestation
D only under any law authorising levy and collection of tax as
envisaged under Article 265 which uses only expression that
no 'tax' shall be levied and collected except authorized by law.
>
-
14. It in its elementary meaning coveys that to support a
E tax legislative action is essential, it cannot be levied and ......
collected in the absence of any legislative sanction by exercise
of executive power of State under Article 73 by the Union or
Article 162 by the State. Under Article 366(28) "Taxation" has
been defined to include the imposition of any tax or impost
'. ,

F whether general or local or special and tax shall be construed
accordingly. "Impost" means compulsory levy.
15. The well known and well settled characteristic of 'Tax'
in its wider sense includes all imposts. Imposts in the context
have following characteristics:
G
(i) The power to tax is an incident of sovereignty. +--- -

(ii) 'Law' in the context of Article 265 means an Act of
legislature and cannot comprise an executive order or rule
H without express statutory authority.
COMMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 991
v. MCDOWELL & CO. LTD. [DR. ARIJIT PASAYAT, J.}

(iii) The term 'Tax' under Article 265 read with Article A
366(28) includes imposts of every kind viz., tax, duty, cess
or fees.

(iv) As an incident of sovereignty and in the nature of
compulsory exaction, a liability founded on principle of B
contract cannot be a "tax' in its technical sense as an
impost, general, local or special.
"'·
16. This Court in the light of decisions starting from State
of Bombay v. F.N. Balsara (AIR 1951 SC 318) held that the
expression "fee" is not used in the State excise laws or rules c
in the technical sense of the expression. By 'licence fee' or
'fixed fee' under excise laws relating to potable liquors/
intoxicant is meant the price or consideration which the
Government charges to the licences for parting with its exclusive
privilege and granting them to the licencees. There is no D
fundamental right to do trade or business in intoxicants. The
State under its regulatory powers has the right to prohibit
absolutely every form of activity in relation to intoxicants, its
manufacture, storage, export, import, sale and possession in
all their manifestations these rights are vested in the State. The E
decision was re-iterated in Har Shankar v. Dy. Excise and
-~ Tc1xation Commissioner(AIR 1975 SC 1121) and State of U.P.
v. Sheopat Rai (AIR 1994 SC 813).

17. In Ahmedabad Urban Development Authority v. F
Sharad Kumar Jayantgi Kumar Pasawalla (AIR 1992 SC
2038) it was held that the crucial expression in Section 438 is
,"by way of. Therefore, it was the duty of revenue authorities to
ascertain whether the deduction which is to be tested on the
touchstone of Section 438(a) is the amount payable is by way G
-A
of tax or duty or fee or cess. The High Court was justified in
holding that the amount does not fall within the purview of
Section 438. The High Court's view is correct.

18. The appeal is dismissed.
H
992 SUPREME COURT REPORTS (2009] 8 S.C.R.

·A CIVIL APPELLATE JURISDICTION : Civil Appeal No.
3511 of 2007. "
DR. ARIJIT PASAYAT, J.1. Questioning correctness of
the judgment rendered by a Division Bench of the Rajasthan
B High Court at Jodhpur, this appeal has been filed.
2. The assessment year involved was 1991-92. The
questions raised before the High Court are as follows: ,, .,
1. Whether on the facts and in the circumstances of
c the case, the ITAT was justified in holding that he unpaid
amount of bottling fee has, on furnishing of the bank
guarantee to be treated as actual payment and accordingly
allowing the deduction in respect of the same under
Section 438 of the Act, even though the sum has not been
D actually paid before the due date of filing the return under }

Section 139( 1) of the Act'>

2. Whether on the facts and in the circumstances of
the case, the ITAT was justified in allowing the depreciation
on research and development assets which related to the
E
closest business of fast food division/unit of the assessee
company as such not used during the previous year?

3. The dispute in essence related to the applicability of ""
Section 438 of the Income Tax Act, 1961 (in short the 'Act') The
F High Court held that the said provision has no application.
4. The High Court following its earlier view in respect of
the assessment year 1988-89 held that the amount of bottling
fees which remain unpaid did not attract applicability of Section
G 438 of the Act. The same question has been considered by
us in Civil Appeal No.3471 of 2007 disposed of separately ~.
today. The view expressed in relation to Section 438 of the Act
applies to this case also. The first question has therefore to be
decided against the revenue.
H
COMMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 993
v. MCDOWELL & CO. LTD.

,1' 5. Coming to the second question, it relates to claim of A
dt3preciation on research and development assets. Stand of the
revenue is that machinery in respect of R & D centre related to
the fast food unit which was closed and therefore the assessee
was not entitled to any depreciation because there was no
actual user of the machinery. B

6. Stand of the assessee on the other hand is that the
' -<(
machinery was used in respect of both the fast food and the
liquor units. This aspect needs to be factually examined.

7. We find that the basic issue as to whether it related to c
b1:>th the units or only to fast food unit which is admittedly closed
has not been examined in detail. We, therefore, remit the
matter to the Assessing Officer to examine this aspect. The
assessee shall be permitted to place material in support of its
claim that the machinery was used for both the units. If it is D
established by material that whole or part of the machinery was
bt3ing used for the liquor unit, whether partly or fully in respect
of those machineries, the deduction can be made, as
permissible in law otherwise not. The matter is therefore
remitted to the assessing officer for doing necessary exercise. E

8. The appeal is disposed of accordingly.

CIVIL APPELLATE JURISDICTION : Civil Appeal No.
2939 of 2006.
F
DR. ARIJIT PASAYAT, J. 1. Questioning correctness of
the judgment rendered by a Division Bench of the Rajasthan
High Court at Jodhpur, this appeal has been filed. The
q1Jestions raised before the High Court are as follows:
G
__. (1) Whether on the facts and in the circumstances of
the case, the l.T~A T. was justified in holding that the
unpaid amount of bottling fee has, on furnishing of
the bank guarantee, to be treated as actual payment
and accordingly allowing the deduction in respect H
994 SUPREME COURT REPORTS [2009] 8 S.C.R.

A of the same under Section 438 of the Act, even A
~
though the sum has not been actually paid before
the due date of filing the return under Section ....
139(1) of the Act.

B (2) Whether on the factg and in the circumstances of
the case, the l.T.A.T. v;as justified in allowing the
depreciation on research & development assets
which related to the closed business of fast food ).- .
division/unit of the assessee-company as such not
c used during the previous year?

(3) Whether on the facts and in the circumstances of
tile case, the l.T.A.T. was justified in deleting the
addition of Rs.2,77,887/- being made treating the
....,..
D
expenditure incurred in purchase of new
transformer as capital expenditure even when the
old transformer still exists in the blocks of asset and
'y ...
not sold, discarded or demolished or destroyed?

2. The dispute in essence related to the applicability of
E Section 438 of the Income Tax Act, 1961 (in short the 'Act') The
High Court held that the provision has no application.

3. The dispute relates to the assessment year 1992-93.
So far as the first two questions are concerned, we have dealt
F
with the issues in Civil Appeal No.3511 of 2007 relating to the '
assessment year 1991-92. Therefore, the answers given in
respect of those questions shall apply so far as the present
assessment year is concerned.

4. The last question relates to the nature of expenditure in
G purchase of new transformers. According to the revenue, the
expenditure incurred is in the nature of capital expenditure when
t-- . .
the old transformers are still included in the block of assets and
not sold or discarded or demolished or destroyed.

H 5. Learned counsel for the revenue placed strong reliance
COMMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 995

-
v. MCDOWELL & CO. LTD.

/
)r
on Commissioner of Income Tax, Madurai and Ors. v. A
Saravana Spinnig Mills (P) Ltd. (2007 (7) SCC 298). It was
highlighted that in Liquidators of Pursa Ltd. v. Commissioner
of Income Tax, Bihar (1954 (25) ITR 265), it was held that the
test is whether it is actually used.
B
6. Learned counsel for the assessee on the other hand
submitted that the Saravana's case (supra) related to a case
. -.( under Section 31, obviously relatable to current repairs. The
assessee's claim on the other hand is relatable to Section 37
of the Act. Strong reliance is placed on a decision of this Court
c
in Commissioner of Income Tax v. Ramaraju Surgical Cotton
Mills ((2007)(294) ITR 328 (SC)). It is fairly accepted by
learned counsel for the assessee that nomenclature in respect
""' of the claim made is not really relevant. and what is relevant, is

... -.j
the nature of the transaction and the expenditure made. Since
neither the Tribunal nor the High Court dealt with the factual
aspect in detail, we remit the matter to the Assessing Officer
D

to ccinsider the respective stands in the background of what has
been stated by this Court in Saravana and Ramaraju cases
(sup1·a).
E
7. The appeal is accordingly disposed of.

./
• CIVIL APPELLATE JURISDICTION : Civil Appeal No .
3473 of 2007.
F
DR. ARIJIT PASAYAT, J. 1. Questioning correctness of
the judgment rendered by a Division Bench of the Rajasthan
High Court at Jodhpur, this appeal has been filed. The
questions raised before this Court are as follows:

1. Whether the· Division Bench of the High Court has not G
, ,..+
grossly erred in law in framing an additional question which
was not referred in the appeal filed by the petitioner herein?

2. Whether in the facts and circumstances of the case, the
Division Bench of the High Court was not justified in law H
996 SUPREME COURT REPORTS [2009] 8 S.C.R.

A in affirming the findings of the ITAT whereby ITAT deleted
the addition of Rs.6 lakhs by holding the unpaid amount
of bottling fee, has on furnishing bank guarantee to be
treated as actual payment and accordingly holding that the
deduction in respect of the same cannot be denied under
B section 43B of the IT Act, 19111?

3. Whether the Division Bench of the High Court has not
erred in law in holding that deduction of an amount of
liability of the assessee to pay bottling fee under the
Rajasthan Excise Act, 1950 read with Rule 69 of the
c Rajasthan Excise Rules was not a fee in its technical sense
and was allowable as revenue expenditure as price paid
to State for parting with its exclusive privilege as an
incident of trading activities by the State for the
assessment year in question?
D
4. Whether in the facts and circumstances of the case, the
Division Bench of the High Court was justified in law in
affirming the findings of the ITAT whereby it deleted the
addition of Rs.6,69,743/- made by the Assessing Officer
E on account of disallowance of Research and development
expenses holding that the same were not covered under
Section 35(1 )(iv) of the IT Act, 1961 by wrongly relying on
the decision in ITA 1546/JP/95 dated 30,3.2001?

F 5. Whether in the facts and circumstances of the case,
the Division Bench of the High Court was justified in law
in affirming the findings the ITAT allowing the depreciation
on research and development assets which related to the
closed business of Fast Food Division/Unit of the
G assessee company as such not used during the previous
year?

6. Whether in the facts and circumstances of the case, the
Division Bench of the High Court was justified in law in
affirming the findings of the ITAT deleting the addition of
H
COMMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 997
v. MCDOWELL & CO. LTD. [DR. ARIJIT PASAYAT. J.]
~-
Ji: Rs.16,69,743/- made by the Assessing Officer on account A
of disallowance of Research and development Expenses
not covered under Section 35( 1)(iv) of the IT Act, 1961 by
"(
wrongly relying on the decision in ITA 1546/JP/95 dated
' 30.3.2001?
B
2. Before the High Court following questions were raised:
... ~ 1. 'Whether on the facts and, in the circumstances of the
case the !TAT was justified in deleting the addition of Rs.6
lacs by holding that unpaid amount of bottling fee has, on
fur11ishing of Bank Guarantee, to be treated as actual c
payment and accordingly the deduction in respect of the
same can not be denied under section 438 of the l.T. Act.
19131?"
-~ ..f. 2. "whether on the facts and in the circumstances of the D
" case the ITAT was justified in allowing the depreciation on
Research and Development Assets which related to the
clc1sed business of Fast Food Division/Unit of the
Assessee company any as such not used during the
pmvious year"? E

~
.. 3. "Whether on the facts and in. the circumstances of the
case the ITAT was justified in deleting the addition of
Rs.6,69,743/- made by the Assessing officer on account
of Disallowance of Research and Development expenses
F
not covered under section 35( 1)(iv) of the Income Tax Act,
by wrongly relying on the decision in the ITA No.1546/JP/
95 dated 30.03.2001 "?

4. "Whether on the facts and in the circumstances of the
case the Hon'ble ITAT was justified in deleting the G
""" ,.. ....
_
dii>allowance of Rs.15,62,580/- holding that the technical
service charges (royalty] payment under consideration is
-;
allowable based on subsequent agreement dated
10.04.1992 at higher rate then that based on earlier
aweement entered into in December, 1990 even though H
-:!
1
998 SUPREME COURT REPORTS [2009] 8 S.C.R.

-1
A earlier agreement entered into In December, 1990 was to j

be effective upto 2000, and had neither been substituted
nor rescinded"?

3. The dispute in essence related to the applicability of
B Section 438 of the Income Tax Act, 1961 (in short the 'Act') The
High Court held that the said provision has no application.

4. The dispute relates to the assessment year 1993-94. ~ ...
In addition to the issues which are common to assessment year
1992-93 which was the subject matter in Civil Appeal No.3511
c of 2007 and Civil Appeal No.2939 of 2006 relatable to the
assessment year 1992-93, our answers to the questions given
in relation to Section 438 and depreciation on research and

-
development machinery and replacement of transformers shall
apply to the facts of the present case also. The additional is~ue
),
D here relates to technical service charges. According to learned
counsel for the revenue, the principles of novatio are applicable
here and there was no commercial expediency for entering into
a fresh contract and there is no financial benefit. We find that
the High Court has noted that it is not the case of the revenue
E that the assessee has not actually paid Rs.30 lacs to McDowell.
It is pointed out that though in two years the payments made
under the new agreement were more than what would have fallen l
due under the original agreement, but for the subsequent years'
transactions, the business expediency claim of the assessee "
F proved to be right. It has been noticed that for the assessment
year 1995-96 under the old agreement, the assessee would
have been required to pay Rs.45.56 lacs towards technical
services charges to Mcdowell, and during the assessment year
1996-97 it would have been required to pay Rs.107.323 lacs
G as per the old agreement whereas the assessee has during
these two y~~ars paid Rs.30 lacs for each year. The Tribunal and ... ~ ~

the High Court recorded a finding that the new agreement in
April, 1992 was not a subterfuge or clandestine device to
reduce the tax liability but was an expenditure incurred on
H
COMMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 999
v. MCDOWELL & CO. L.TD.
,._
)I business expediency and the decision of the parties to enter A
into an agreement was based on commercial consideration.
The finding is essentially a finding of fact based on cogent
assessment of the factual scenario. We find nothing infirm in
the decision of the Tribunal and the High Court to warrant
ihteHierence. The challenge of the revenue on that ground fails. B
5. The appeal is disposed of accordingly.
... -<(
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
347~~ of 2007.
c
DR. ARIJIT PASAYAT, J. 1. Questioning correctness of
the judgment rendered by a Division Bench of the Rajasthan
High Court at Jodhpur this appeal has been filed. The questions
raiseid before this Court are as follows:
....) ~ D
1. Whether the unpaid amount of Rs.12,67 ,656/- furnishing
of bank guarantee could be allowed as a deduction under
Section 438 of the IT Act, 1961?
2. Whether the furnishing of bank guarantee can be treated
as actual payment for the purpose of Section 438 of the E
IT Act, 1961?
~ 3. Whether the High Court erred in law in not following its
" earlier decision in Commissioner of Income Tax v.
Rajasthan Patrika Ltd. (258 ITR 300) and thereby holding
that furnishing of bank guarantee was actual payment? F

4. Whether the bottling fee payable by the assessee and
chargeable under the Rajasthan Excise Act, 1950 and the
Rules framed there under being the consideration
receivable by the State for parting with its exclusive G
• r it privilege to deal in potable liquor, was in the nature of any
sum payable by way of tax, duty, cess or fee, by whatever
name called, under any law for the time being in force had
to be actually paid in cash or by cheque for claiming
H
1000 SUPREME COURT REPORTS [2009] 8 S.C;R.

-1
;j
A deduction under Section 438 of the IT Act, 1961?

2. The questions raised before the High Court are as
follows:

(1) Whether on the facts and in the circumstances of the
B case the ITAT was justified in deleting the addition of Rs.
12,67,656/- by holding that unpaid amount of bottling fee
has, on furnishing of bank guarantee, to be treated as ,. ~

actual payment and accordingly the deduction in respect
of the same cannot be denied U/s. 438 of the Income-tax
c Act, 1961?
(2) Whether on the facts and in the circumstances of the
case the ITAT was justified in deleting the addition of Rs.
38,442/- made by the Assessing Officer on account of
D
disallowance of Research and Development expenses not
covered U/s. 35(1 )(iv) of the Income-tax Act, by wrongly
relying on the decision in ITA No.1546/JP/95 dated
30.03.2001?
(3) Whether on the facts and in the circumstances the ITAT
E is justified in allowing the depreciation on rtisearch &
Development assets which related to the closed business
of Fast Food Division/unit of the assessee company and ~

as such not used during the previous year?" '-

F (4) Whether in the facts and circumstances of the case
bottling fees chargeable from the assessee under the
Rajasthan Excise Act, 1950 and interest chargeable on
late payment of bottling fees amount to tax, duty, cess or
fees within the meaning of section 438 of l.T. Act, 1961
G so as to attract the said provisions while considering
allowability of deduction of such expenses? .. "" .
3. The dispute relates to assessment year 1995-96. First
dispute in essence related to the applicability of Section 438
of the Income Tax Act, 1961 (in short the 'Act'), the High Court
H
.
CC)MMISSIONER OF INCOME TAX, UDAIPUR, RAJASTHAN 1001
v. MCDOWELL & CO. LTD.
~

• hHld that provision has no application . A

4. The said issue in the present appeal is revolving round
the applicability of Section 438 of the Act. In view of our
decision in Civil Appeal No.3471 of 2007 relating to the
a8sessment year 1988-89 which has been disposed of today, B
the said issue is answered in favour of the assessee and
against the revenue .
.. ~
5. So far as the second issued is concerned in Civil
Appeal No.3511 of 2007 relating to assessment year 1991-92
and Civil Appeal no.3473 of 2007 relating to the assessment c
y1ear 1993-94, matter has been remitted to the Assessing
Officer for factual adjudication of the rival stands. Similar
direction is given in the present case.
~
-<f.
6. The appeal is disposed of accordingly. D
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
3512 of 2007.
DR. ARIJIT PASAYAT, J. 1. Questioning correctness of
the judgment rendered by a Division Bench of the Rajasthan E
High Court at Jodhpur this appeal has been filed. The questions
raised before this Court are as follows:
;,
" 1. Whether the High Court is right in laws and on the
facts of the case in dismissing the appeal of the ·revenue?
F
2. Whether the High Court has failed to consider the
following substantial questions of law:
A. Whether on the facts and in the circumstances of
the case, the ITAT was justified in deleting the addition of G
Rs.5,51,262/- by holding that unpaid amount of bottling fee
. ~ 1
has, on furnishing of bank guarantee to be treated as
actual payment and accordingly the deduction in respect
of the same cannot be denied under section 438 of the IT
Act, 1961? H
1002 SUPREME COURT REPORTS [2009] 8 S.C.R.

A B. Whether in the facts and in the circumstances of ~
"""'"
the case, the ITAT was justified in law in deleting the
addition of Rs.38,442/- made by the assessing officer on
account of disallowance of research and development
expenses not covered under Section 35(1)(iv) of the IT Act,
B 1961 by wrongly relying on the decision in ITA 1546/JP/
95 dated 30.3.2001?

C. Whether in the facts and in the circumstances of
)- ..
the case, the Division Bench of the High Court was justified
in law in affirming the findings of the ITAT allowing the
c depreciation on research and development assets which
related to the closed business of Fast Food Division/Unit
of the assessee company as such not used during the
previous year?
~ ~

D D. Whether in the facts and in the circumstances of
the case, the Division Bench of the High Court was justified
in affirming the findings of ITAT deleting the disallowance
of Rs.14,51,100/- holding that the technical service
charges (royalty) payment under consideration is allowable
E based on subsequent agreement dated 10.4.1992 at
higher rate than that based on earlier agreement entered
into in December, 1990 even though earlier agreement
/
entered into in December, 1990 was to be effective upto
2000 and had neither been substituted nor rescinded?
F
3. The question raised before the High Court are same as
raised for assessment years 1991-92 and 1992-93.

4. The dispute in essence related to the applicability of
Section 43B of the Income Tax Act, 1961 (in short the 'Act') The
G High Court held that the said provision has no application.
,. ~ .
5. The dispute relates to the assessment year 1994-95.
In addition to the issues which are common to assessment year
1991-92, 1992-93 which are the subject matter in Civil Appeal
H No.3511 of 2007 and Civil Appeal No.2939 of 2006, our
COMMISSiONER OF INCOME TAX, UDAIPUR, RAJASTHAN1003
v. MCDOWELL & CO. LTD. [DR. ARIJIT PASAYAT, J.]

~

). answers to the questions given in relation to Section 438 and A
depreciation on research and development machinery and
reiplacement of transformers shall apply to the facts of the
present case also. The additional issue here relates to
teichnical service charges. According to learned counsel for the
revenue the principles of novatio are applicable here and there B
was no commercial expediency for entering into a fresh contract
.....
and there is no financial benefit. We find that the High Court
has noted that it is not the case of the revenue that the assessee
'.! has not actually paid Rs.30 lacs to McDowell. It is pointed out
that though in two years the payments made under the new c
agreement were more than what would have fallen due under
the original agreement but for the subsequent years'
· transactions, the business expediency claim of the assessee
proved to be right. It has been noticed that for the assessment
,, ~
year 1995-96 under the old agreement, the assessee would D .
have been required to pay Rs.45.56 lacs towards technical
services charges to Mcdowell and during the assessment year
1996-97 it would have been required to pay Rs.107.323 lacs
ais per the old agreement whereas the assessee has during
tl:lese two years paid Rs.30 lacs for each year. The Tribunal and E
the High Court recorded a finding that the new agreement in
April, 1992 was not a subterfuge or clandestine device to
\ reduce the tax liability but was an expenditure incurred on
business expediency and the decision 6f the parties to enter
into an agreement was based on commercial consideration. F
The finding is essentially a finding of fact based on cogent
assessment of the factual scenario. We find nothing infirm in
the decision of the Tribunal and the High Court to warrant
interference. The challenge of the revenue on that ground fails.·

6. The appeal is disposed of. G
. .. 1
D.G. Appeal disposed of.