2012 (9) TMI 842 - HC - Income Tax

Deduction paid as upfront fee and bank charges - disallowance u/s 40 (a) (ii) - ITAT allowed the claim - Held that - As per section 35AB that deduction is permissible in respect of any lump sum consideration for acquiring any know-how for use for the purposes of the assessee s business. Consideration in section 35AB is to be understood in the sense in which it has been used in the Indian Contract Act. Therefore the word consideration would include the entire obligation of the assessee, without which the assessee would not be able to acquire the know-how. Having no reason to disagree with, and the language of Section-40 (a) (ii) - which in our opinion is expansive enough to cover payments of the kind as the Court has now to deal with we feel that no substantial question of law arises for consideration - in favour of assessee.

Summary

Issues:
- Appeal against ITAT order allowing deduction of upfront fee and bank charges under Section 40(a)(ii)

Analysis:
The case involved an appeal by the Revenue against the ITAT order allowing the assessee deduction of upfront fee and bank charges. The assessee, a foreign company registered in Bangkok, obtained a loan for a Hydro Electric Power Project in Himachal Pradesh. The Assessing Officer disallowed the upfront fee and bank charges under Section 40(a)(ii). The CIT (A) upheld the disallowance, considering the expenditure as acquiring a capital asset. However, the ITAT agreed with the assessee, relying on judgments in Tata Yadogawa Ltd and CIT v. Standard Polygraph Machines P. Ltd. The ITAT held that the tax borne by the assessee was part of the consideration agreed to be paid. The Court referred to Section 35AB, stating that the word "consideration" includes the entire obligation of the assessee. It held that the payment of taxes was an integral part of the consideration for acquiring the know-how. The Court found no substantial question of law and dismissed the appeal.

In summary, the key issue in this case was the disallowance of upfront fee and bank charges by the Assessing Officer under Section 40(a)(ii). The ITAT allowed the deduction, and the Court upheld the decision based on the understanding of "consideration" under Section 35AB. The Court found that the payment of taxes was an essential part of the consideration for acquiring the know-how, leading to the dismissal of the appeal.