2013 (4) TMI 11 - HC - Income Tax

Transfer of technology know-how expenditure on know-how whether the expenditure incurred is revenue expenditure or whether it is an expenditure which is capital in nature - Held that - Assessee had not purchased or obtained ownership of such technical know-how from the foreign company. The assessee was merely a licensee for the purpose of its business temporarily. For such acquisition of know-how, the assessee paid lump sum payment. It had also come on record before the Tribunal that such technical know-how was used for the purpose of manufacturing the existing items which the assessee was manufacturing since years. - the expenditure are revenue in nature. Reliance made in the case of Commissioner of Income Tax v. Swaraj Engines Ltd. 2008 (5) TMI 257 - SUPREME COURT . The provisions of section 35AB of the Act can apply only in case of capital expenditure and of course, provided the conditions set out therein are fulfilled. In such a case, during the period when section 35AB remained in operation, the assessee could claim benefit thereof. However, such provision would not apply to a revenue expenditure even if the same was incurred for acquisition of technical know-how. Deduction on such expenditure was available even before the introduction of section 35AB of the Act and such deduction cannot be curtailed or limited by applying section 35AB. In that view of the matter, taking such an expenditure out of section 37(1) of the Act, would not arise. The tax appeals are dismissed.

Summary

Issues:
Applicability of section 35AB of the Income Tax Act, 1961 to expenditure incurred by the assessee for acquiring technical know-how.

Analysis:
The appeals involved the same assessee and the identical issue of the applicability of section 35AB of the Income Tax Act, 1961, regarding the expenditure incurred for acquiring technical know-how. The Assessing Officer and C.I.T. (Appeals) held that the assessee could benefit from only 1/6th of such expenditure under section 35AB. However, the Tribunal, following its previous judgment for the same assessee, allowed the entire expenditure as claimed. The Tribunal confirmed that the expenditure was revenue in nature, and the assessee had not purchased the technical know-how but was a licensee using it temporarily for business purposes. The Tribunal also considered that the expenditure was used for manufacturing existing items, which the assessee had been producing for years.

The Division Bench of the High Court had previously dismissed the revenue's appeal concerning the same assessee for the assessment year 1989-90. It was debated whether the revenue was justified in applying section 35AB or if the assessee was correct in contending that the provision did not apply. The Court noted that section 35AB provided for deduction of lump sum payments made for acquiring know-how for business purposes, spread over six years. The nature of the expenditure was crucial in determining the applicability of section 35AB. The Court referred to a Supreme Court decision emphasizing that if the expenditure was revenue in nature, section 35AB might not apply, but if it was capital, the amortization and spreading over provisions would apply.

The Court highlighted that section 35AB was introduced to encourage indigenous scientific research by providing deductions for acquiring technical know-how. It clarified that the provision was not meant to limit existing benefits for revenue expenditure on know-how acquisition. The Court emphasized that section 35AB applied to capital expenditure, and deductions were available if the conditions were met. However, it did not apply to revenue expenditure, which was already deductible under section 37(1) of the Act. Therefore, the Court concluded that the provision of section 35AB would not restrict or curtail deductions for revenue expenditure on technical know-how acquisition.

In conclusion, the Court, following its previous judgment, ruled in favor of the assessee and against the revenue, dismissing the tax appeals.