2002 (9) TMI 80 - HC - Income Tax

Expenditure On Acquiring Know-How - whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in holding that the assessee is entitled to deduction under section 35AB? - Section 35AB is designed to provide relief to the assessee who paid a lumpsum consideration for acquisition of know-how. The time with reference to which the assessee s entitlement is to be judged is the previous year in which the payment was made and not the subsequent year in which the assessee s project was either abandoned or the know-how became useless by reason of the non-availability of other inputs required to make the project success. The return of the know-how in the subsequent year would not affect the factum of payment having been made in the relevant previous year for the purpose of acquisition of the know-how. - The Tribunal therefore was right in the view it took

Summary

Issues:
1. Entitlement to deduction under section 35AB for expenditure incurred on acquiring know-how.

Analysis:
The High Court of MADRAS was faced with the issue of whether the assessee, engaged in manufacturing sodium hydro sulphate, was entitled to a deduction under section 35AB for the expenditure incurred on acquiring know-how for manufacturing sodium formate. The assessee had entered into collaboration agreements with companies from Germany and Japan for acquiring the necessary industrial information. The Assessing Officer initially denied the deduction, deeming the expenditure as capital in nature. However, the Tribunal allowed the deduction by considering the expenditure as incurred for acquiring know-how likely to assist in the manufacturing process.

The Revenue contended that since the assessee had returned the know-how to the Japanese company and the project was abandoned, the deduction should not be allowed as the assessee no longer owned the know-how. The definition of "know-how" under section 35AB includes industrial information likely to assist in manufacturing goods. The court held that the industrial information acquired by the assessee during the relevant year for manufacturing goods prima facie entitled the assessee to the deduction under section 35AB.

Section 35AB, introduced in 1985 and operational until 1997, mandated that expenditure incurred for acquiring know-how should be treated in accordance with the section. The deduction allowable for such expenditure was 1/6th of the amount paid as lump-sum consideration for acquiring the know-how. The court emphasized that the entitlement of the assessee should be judged based on the previous year in which the payment was made, regardless of subsequent events like project abandonment or know-how becoming useless due to external factors.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and against the Revenue. The court affirmed that the assessee was entitled to the deduction under section 35AB for the expenditure incurred on acquiring know-how, emphasizing the importance of evaluating entitlement based on the year of payment and the purpose of acquiring the industrial information.

This detailed analysis of the judgment highlights the interpretation and application of section 35AB in determining the entitlement to deduction for expenditure on acquiring know-how, providing a comprehensive understanding of the legal reasoning and outcome of the case.