2004 (9) TMI 24 - HC - Income Tax

Payment made by assessee to sister concern for getting technical know-how - Whether the provisions of section 35AB are attracted in the facts of the case notwithstanding the finding recorded by the Tribunal that the payment in question made by the assessee to its sister concern is in the nature of revenue expenditure, or in other words notwithstanding the fact that the payment in question made by the assessee to its sister concern is regarded as revenue expenditure, whether the provisions of section 35AB are attracted for claiming deduction, or not. - held that notwithstanding the fact that though payment made by the assessee was in the nature of revenue expenditure, yet the provisions of section 35AB ibid will apply.

Issues Involved:
1. Nature of the payment made by the assessee to its sister concern: capital or revenue expenditure.
2. Applicability of Section 35AB of the Income-tax Act, 1961, to the technical know-how expenses.
3. Allowability of royalty payment as revenue expenditure.
4. Justification of expenditure treated as non-business purpose by the Assessing Officer.

Detailed Analysis:

1. Nature of Payment: Capital or Revenue Expenditure
The primary issue was whether the payment of Rs. 1,03,742 made by the assessee to its sister concern for technical know-how and use of the brand name "Bright" should be treated as capital expenditure or revenue expenditure. The Assessing Officer initially classified it as capital expenditure. However, the Commissioner of Income-tax (Appeals) reversed this finding, treating it as revenue expenditure, which was upheld by the Income-tax Appellate Tribunal. The High Court noted that the Revenue did not challenge this finding in the current appeal, thus accepting the Tribunal's view that the payment was of a revenue nature.

2. Applicability of Section 35AB
The core question was whether Section 35AB, which deals with deductions for expenditure on know-how, applies even if the payment is considered revenue expenditure. Section 35AB allows for the deduction of one-sixth of the lump sum payment for know-how each year over six years. The High Court interpreted the term "acquiring" in Section 35AB liberally, stating that even if the assessee does not become the absolute owner of the know-how but can use it effectively for business, the section applies. The Court concluded that the payment satisfied the requirements of Section 35AB, thus reversing the Tribunal's decision and applying Section 35AB to the assessee's payment.

3. Allowability of Royalty Payment as Revenue Expenditure
In the connected appeals (I.T.A. Nos. 41 and 44 of 1999), the Tribunal had allowed the royalty payments as revenue expenditure. The High Court, referring to its earlier decision and relevant Supreme Court judgments, upheld that royalty payments made by the assessee to its sister concern were indeed revenue expenditure. Consequently, the High Court answered this issue against the Revenue and in favor of the assessee.

4. Justification of Expenditure Treated as Non-Business Purpose
The Revenue also challenged the Tribunal's decision to allow certain expenditures treated by the Assessing Officer as non-business expenses. However, the High Court deemed this question academic and did not find it necessary to address it explicitly. The focus remained on the applicability of Section 35AB and the nature of the royalty payments.

Conclusion
The High Court allowed the appeal in part, setting aside the Tribunal's order regarding the applicability of Section 35AB. It held that Section 35AB applies to the assessee's payment for technical know-how, even if considered revenue expenditure. The royalty payments were affirmed as revenue expenditure, and the appeal was partly allowed with no costs.

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