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Interpretation of tax law regarding deduction of royalty payment for technical know-how without government approval. Analysis: The case involved a dispute over the deduction of royalty payment made for technical know-how without government approval for the assessment year 1980-81. The assessee entered into a collaboration agreement with a foreign company for technology upgradation, agreeing to pay a lump sum royalty. The Income-tax Officer disallowed the deduction on the grounds of being of capital nature and lacking government approval during the relevant accounting period. The Commissioner of Income-tax (Appeals) upheld the disallowance due to the absence of government approval, without delving into the nature of the expenditure. The Income-tax Appellate Tribunal, however, held that the liability accrued retrospectively upon government approval, remanding the decision on the expenditure's nature. The High Court analyzed the timeline of events, emphasizing that the liability only arose upon government approval, citing precedents where liabilities were deemed to accrue only post-government approval. Therefore, the court ruled in favor of the Revenue, disallowing the deduction as the liability accrued only upon government approval, which occurred after the relevant accounting period. The key issue revolved around whether the liability for royalty payment accrued before government approval. The court considered the retrospective effect of approval, citing precedents where liabilities were held to arise post-government approval. The court emphasized that the liability to pay royalty did not accrue during the accounting year but upon government approval in the subsequent year. This interpretation was based on legal precedents and the specific timeline of events in the case, leading to the disallowance of the deduction. The court's decision was based on the interpretation of tax laws and legal precedents regarding the accrual of liabilities for royalty payments. The court highlighted that the liability only arose upon government approval, rejecting the assessee's argument that approval operated retrospectively from the agreement date. Citing relevant case laws, the court clarified that liabilities of this nature accrue only post-government approval. Consequently, the court ruled in favor of the Revenue, disallowing the deduction claimed by the assessee for the assessment year 1980-81.
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