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2014 (7) TMI 92 - HC - Income TaxAllowability of expenses u/s 37(1) of the Act Technical know-how fee - revenue expense or capital expense Held that - Following Commissioner of Income Tax v. Swaraj Engines Ltd. 2008 (5) TMI 257 - SUPREME COURT and Dy. CIT v. Sayaji Industries Ltd. 2013 (4) TMI 11 - GUJARAT HIGH COURT - assessee was merely a licensee for the purpose of its business temporarily - For 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 and the expenses are allowable u/s 37(1) of the Act Decided against Revenue.
Issues Involved:
1. Whether the technical know-how fees of Rs.24,04,000/- should be treated as allowable expenses under Section 37(1) or Section 35AB of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Nature of Technical Know-How Fees: The primary issue in the appeal was whether the technical know-how fees of Rs.24,04,000/- claimed by the assessee should be treated as allowable expenses under Section 37(1) or Section 35AB of the Income-tax Act, 1961. The Assessing Officer initially treated this expenditure as revenue in nature but denied the application of Section 37, stating that the expenses were covered under Section 35AB, which pertains to lump sum payments for acquiring technical know-how. Consequently, the expenditure was added to the total income of the assessee. 2. Decision of the Commissioner of Income Tax (Appeals): The assessee challenged the Assessing Officer's decision before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the Assessing Officer's view. The CIT(A) emphasized that the term 'know-how' has a broad meaning as per the Explanation to Section 35AB, including any industrial information or technique likely to assist in the manufacture or processing of goods. The CIT(A) concluded that the Assessing Officer was justified in not allowing the entire claim under Section 37(1) and restricting the deduction under Section 35AB. 3. Tribunal's Examination and Decision: Upon further appeal, the Tribunal examined the agreement between the assessee and the foreign company, considering various clauses. The Tribunal followed its own decision in the case of Dy. CIT v. Sayaji Industries Ltd., concluding in favor of the assessee. It directed the Assessing Officer to allow the expenditure under Section 37(1), as the assessee did not acquire ownership of the technical know-how but merely a license for its temporary use in business. The Tribunal noted that the expenditure was for manufacturing existing items and was revenue in nature. 4. High Court's Analysis and Judgment: The High Court noted that the issue was identical to that in Tax Appeal No.326 of 2000 and referred to the Supreme Court's decision in Commissioner of Income Tax Vs. Swaraj Engines Ltd., which clarified that the nature of the expenditure must be determined first. If the expenditure is revenue in nature, Section 35AB does not apply. The Court observed that the Assessing Officer and CIT(A) had both accepted the expenditure as revenue in nature. Therefore, Section 35AB, which deals with capital expenditure, was not applicable. The Court emphasized that Section 35AB was introduced to provide additional benefits for capital expenditure on technical know-how, not to restrict existing benefits under Section 37(1) for revenue expenditure. 5. Conclusion: The High Court concluded that since the nature of the expenditure was undisputedly revenue, the assessee was entitled to claim it under Section 37(1). The appeal was answered in favor of the assessee and against the Revenue, affirming that the technical know-how fees should be treated as allowable expenses under Section 37(1) of the Income-tax Act, 1961. The Tax Appeal was accordingly disposed of.
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