2015 (5) TMI 8 - HC - Income Tax

Technical know-how - whether be allowed as expenditure under Section 35AB or Section 37 - whether Tribunal erred in not holding that deduction contemplated under Section 35 AB is only in respect of a capital nature and the deduction of a revenue nature is allowable under Section 37(1)? - Held that - The reading of Section 37 of the Act makes it more clear that any expenditure not being expenditure of the capital nature described in Sections 30 to 36 shall be allowed in computing the income chargeable under the heads profits and gains in the business or profession . It means that Section 35AB is applicable only if the expenditure is in the nature of capital expenditure. Though the Commissioner of Income Tax (Appeals) has held that the expenditure incurred by the assessee is revenue in nature, falling under Section 37 of the Act, the Tribunal failed to appreciate the same in the right perspective and has come to a conclusion that Section 35AB being a specific Provision for technical know, general Provision of Section 37 of the Act is not applicable, which is not sustainable, in view of the judgments discussed above and in terms of the contract. We are thus to allow this appeal for two reasons. Firstly, there is no acquisition of technical know-how as contemplated under Section 35AB of the Act, and secondly, Section 35AB would not apply to a revenue expenditure. As discussed earlier, judgment of the Apex Court in Drilcos (India) (2012 (9) TMI 299 - SUPREME COURT) is distinguishable and not applicable to the facts of the case and the later judgment of the Apex Court rendered in the case of Swaraj Engines (2008 (5) TMI 257 - SUPREME COURT) is squarely applicable to the facts of the case. Allow this appeal by setting aside the order of the Tribunal holding that the expenditure incurred by the assessee towards the procurement of technical know how by paying a lumpsum consideration for use in the course of business is a revenue expenditure falling u./s 37 of the Act and the provisions of Section 35 AB of the Act are not applicable to the present case. - Decided in favour of the assessee

Summary

Issues Involved:
1. Whether the amount expended for procuring technical know-how should be allowed as expenditure under Section 35AB or Section 37 of the Income Tax Act.
2. Whether the deduction under Section 35AB is applicable only for capital expenditure, while revenue expenditure should be allowed under Section 37(1) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Applicability of Section 35AB vs. Section 37 for Technical Know-how Expenditure:

The appellant, a company engaged in producing engineering products, entered into an agreement with a UK-based company, WCL, for procuring technical know-how. The appellant claimed a 100% deduction on the expenditure as revenue expenditure under Section 37 of the Income Tax Act. However, the Assessing Officer (AO) categorized it under Section 35AB. The Tribunal, following the High Court's remand, upheld the AO's decision. The High Court had to determine whether the expenditure should be categorized under Section 35AB or Section 37.

2. Nature of Expenditure - Capital vs. Revenue:

The appellant argued that the technical know-how was not absolutely transferred but was only a right to use, thereby making the expenditure revenue in nature. The control over the know-how remained with WCL, and no enduring benefit accrued to the appellant. The appellant relied on several judgments, including CIT vs. Swaraj Engines Limited, which held that if the expenditure is revenue in nature, Section 35AB does not apply.

3. Interpretation of Relevant Clauses and Legal Precedents:

The High Court examined the agreement clauses, which indicated that the appellant had only the right to use the know-how without absolute acquisition. The clauses on confidentiality, termination, and manufacture demonstrated that the control remained with WCL. The court also considered CBDT Circulars and the Finance Minister's Budget Speech, which clarified that Section 35AB applies to capital expenditure.

4. Analysis of Judgments and Legal Provisions:

The court referred to several judgments, including Swaraj Engines Ltd., which emphasized that Section 35AB applies only to capital expenditure. The court noted that the Tribunal failed to appreciate that the expenditure was revenue in nature and incorrectly applied Section 35AB. The court distinguished the case from Drilcos (India) Pvt. Ltd., where the focus was on disputes regarding payment rather than the nature of the expenditure.

Conclusion:

The High Court concluded that the expenditure incurred by the appellant for procuring technical know-how was revenue in nature and should be allowed under Section 37 of the Income Tax Act. The court set aside the Tribunal's order, holding that Section 35AB is applicable only to capital expenditure and not to revenue expenditure. The appeal was allowed in favor of the assessee.