2007 (3) TMI 203 - HC - Income Tax

Issues Involved:
1. Classification of the technical know-how fee as capital expenditure.
2. Applicability of section 35AB of the Income-tax Act, 1961.
3. Interpretation of "technical know-how" under the Explanation to section 35AB.
4. Relevance of judicial precedents cited by the appellant.

Detailed Analysis:

Classification of the Technical Know-how Fee as Capital Expenditure:
The primary issue in the appeal was whether the sum of Rs. 6,20,000 paid by the assessee to NIIT Ltd. for technical know-how should be classified as capital expenditure. The Assessing Officer treated the amount as capital expenditure under section 35AB of the Act, permitting only 1/6th of the amount to be debited in the profit and loss account for the year, with the balance to be spread over the subsequent five years. The appellate authority and the Tribunal, however, concluded that the expenditure was not capital in nature, thereby allowing the entire amount to be debited in the year it was incurred.

Applicability of Section 35AB of the Income-tax Act, 1961:
Section 35AB deals with the treatment of expenditure on acquiring technical know-how. According to the Revenue, the fee paid by the assessee fell under this section and should be treated as capital expenditure. The Tribunal, however, held that the activities of the assessee did not fall within the purview of section 35AB, as the technical know-how was not used for manufacturing or processing goods, but for educational purposes.

Interpretation of "Technical Know-how" Under the Explanation to Section 35AB:
The Explanation to section 35AB defines "technical know-how" as any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well, or other sources of mineral deposits. The Tribunal, supported by the appellate authority, found that the assessee's activities-imparting computer training-did not fit this definition. The technical know-how was used for educational purposes, which did not involve manufacturing, processing, or mining activities.

Relevance of Judicial Precedents Cited by the Appellant:
The appellant cited the Supreme Court's decision in Southern Switch Gear Ltd. v. CIT, where a collaboration agreement for setting up a factory was treated as capital expenditure. However, the court noted that this precedent was not applicable as the assessee was not involved in any manufacturing or processing activities. Similarly, the appellant referred to Tata Consultancy Services v. State of A. P., where intellectual property was considered "goods" for sales tax purposes. The court clarified that this interpretation was specific to the Sales Tax Act and not applicable to the Income-tax Act.

Conclusion:
The court concluded that the technical know-how acquired by the assessee was used solely for educational purposes and did not assist in manufacturing or processing goods, or in mining activities. Therefore, the definition of "technical know-how" under section 35AB did not apply, and the expenditure could not be treated as capital expenditure. Consequently, the appeal was dismissed, and no substantial question of law was found to be involved.