2011 (11) TMI 85 - HC - Income Tax

Whether the amounts spent towards purchase of designs and drawings and towards consultancy charge for the purchase of obtaining technical know-how be considered the amounts spent under the provisions of Section 35 AB of the Act or Section 37(1) of the Act ? - Held that - where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gain, know-how means any industrial information or technique likely to assist in the manufacture. - In the case of CIT Vs. Tamil Nadu Chemical Products Ltd., (2002 -TMI - 12215 - MADRAS High Court). It was held therein that irrespective of whether it is a capital or revenue expenditure , the expenditure incurred for the purpose of acquiring know-how was required to be treated only in accordance with Section 35AB and the deduction that was allowable was one-sixth of the amount paid as lump sum consideration for acquiring the know-how. Regarding payment of consultancy charges - Held that - It is not in dispute that the said sum was incurred for market survey of raw-materials used in the assessee s business. - the said amount paid as consultancy charge cannot be treated as an amount spent in getting know-how or technique likely to assist in the manufacture or processing of goods i.e., augmenting the business of the assessee. - allowed as expenditure u/s 37(1) - Decided in favor of assessee partly.

Summary

Issues:
1. Allowability of expenditure for the purchase of design and drawings under Section 37(1) or Section 35AB of the Income Tax Act.

Analysis:
The High Court of Madras addressed the issue of whether the amount paid by the assessee for the purchase of design and drawings is an allowable expenditure under Section 37(1) or for deduction under Section 35AB of the Income Tax Act for the assessment year 1990-91. The assessee had paid a total amount of Rs. 11,39,195, with Rs. 10,39,195 paid to a company in Switzerland for designs and drawings and Rs. 1,00,000 paid to a consultancy in Bombay. The Assessing Officer treated the amounts as expenditure for obtaining technical know-how and applied Section 35AB, allowing only a portion as deduction. The Commissioner of Income Tax (Appeals) reversed this decision, allowing the entire amount under Section 37(1) citing the consultancy charge as a business expenditure. The High Court noted that the Tribunal did not consider Section 35AB and its explanation, which mandates deductions for acquiring know-how. The Court referred to Section 35AB and relevant case law to determine that the payment for designs and drawings falls under technical know-how, thus attracting Section 35AB. The Court upheld the Assessing Authority's decision overruling the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal.

The Court also addressed the consultancy charge of Rs. 1,00,000, confirming the Income Tax Appellate Tribunal's decision to treat it as a business expenditure under Section 37(1) since it was for a market survey of raw materials, not related to acquiring know-how for manufacturing or processing goods. The Court cited the introduction of Section 35AB in 1986, rendering previous case law irrelevant. Consequently, the Court partly allowed the Tax Case Appeal, ruling in favor of the Revenue regarding the payment for designs and drawings falling under Section 35AB and in favor of the assessee for the consultancy charge being a business expenditure under Section 37(1).