2012 (7) TMI 491 - HC - Income Tax

Payment for know-how - deductible under Section 37 as a Revenue expenditure OR Section 35AB ? - Held that - As decided in CIT Versus Kirloskar Tractors Ltd. 1998 (2) TMI 117 (HC) wherein the assessee having entered into an agreement for execution of the turn-key project and at the request of the said client acquired technical know-how to be used in its engineering, activity the confidentiality that has to be maintained on the technical know-how obtained, it is clear that the entire expenditure incurred by the assessee was towards its profit making process qualifying for deduction as revenue expenditure. That being so, going by the provisions under Section 37 the said expenditure qualifies for deduction u/s 37 and hence Section 35AB has no application to the facts of the case - in favour of assessee.

Summary

Issues:
Whether payment for know-how is deductible under Section 37 as a Revenue expenditure when there is a specific section i.e., Section 35AB covering the same?

Analysis:
The case involved a dispute regarding the deductibility of payment for technical know-how under Section 37 as a Revenue expenditure, despite the presence of Section 35AB covering such payments. The assessee, engaged in various manufacturing activities, obtained technical know-how from foreign entities for a turn-key project with a specific client. The Assessing Officer rejected the claim for deduction under Section 37, insisting it fell under Section 35AB. The Commissioner of Income Tax (Appeals) also upheld this view. However, the Income Tax Appellate Tribunal allowed the claim under Section 37, leading to the Revenue's appeal before the High Court.

The Revenue argued that expenditure on technical know-how should be assessed under Section 35AB, not as revenue expenditure. In contrast, the assessee relied on precedents emphasizing that if the expenditure is revenue in nature, Section 35AB may not apply. They contended that such expenditure, integral to their business activities, should be considered revenue expenditure, citing relevant case law.

The High Court noted that the nature of the expenditure, whether for revenue or capital purposes, must be determined based on the specific facts and circumstances. Referring to relevant case law, the court emphasized that if the expenditure is for conducting business activities and part of the profit-making process, it qualifies as revenue expenditure. The court highlighted a case where expenditure on technical collaboration was considered revenue expenditure due to its role in enhancing business efficiency and profitability.

Based on the facts presented, the High Court concluded that the expenditure on technical know-how was essential for the profit-making process of the assessee's business and thus qualified for deduction under Section 37 as revenue expenditure. The court dismissed the tax case appeal, confirming the Tribunal's decision, and ruled that Section 35AB did not apply in this case.