2017 (9) TMI 486 - HC - Income Tax

Payment for technical knowhow - nature of expenditure - revenue expenditure under Section 37(1) or capital expenditure under Section 35AB - Held that - The acquisition of technical knowhow is by way of license for manufacture of the raw material required for the parent business of steel production. The raw material produced is required to be used for the finished product of which the main business of manufacture of steel is undertaken by the respondent. In our view, this aspect has been dealt with by the Division Bench of the Gujarat High Court in the decision in case of Commissioner of Income Tax vrs. Suhrid Giegy Ltd., reported in (1995 (12) TMI 25 - GUJARAT High Court) It is apparent that all factors taken into consideration clearly indicate that it is a revenue expenditure and we do not find any error is committed by the Tribunal in holding that it is covered by Section 37(1) of the Income Tax Act. The substantial questions of law are answered accordingly. The appeals are, therefore, dismissed.

Summary

Issues:
1. Interpretation of expenditure as revenue or capital under Section 37(1) and Section 35AB of the Income Tax Act.

Analysis:
The High Court of Bombay dealt with two appeals involving common substantial questions of law related to the treatment of expenditure incurred by the assessee. The primary issue was whether the ITAT was justified in directing the Assessing Officer to allow deduction under Section 37(1) of the Income Tax Act instead of Section 35AB. The ITAT had allowed the claim for revenue expenditure under Section 37(1), rejecting the Department's argument that it should be treated as capital expenditure under Section 35AB. The Court examined the agreements between the assessee and the concerned parties to determine the nature of the expenditure.

The Court observed that the assessing officer did not provide reasons to classify the expenditure as capital under Section 35AB. The agreements revealed that the assessee had limited rights to use the technology and designs exclusively for the blast furnace plant being set up, without acquiring ownership or transfer rights. The Court referenced the Apex Court's decision in Honda Siel Cars India Ltd., emphasizing that the classification of expenditure as revenue or capital depends on the specific facts and agreements of each case. The Court distinguished the present case from the Honda Siel judgment, noting the nature of the business and ownership transfer.

The Court agreed with the findings of the ITAT, emphasizing that the acquisition of technical knowhow was essential for the parent business of steel production. Citing a decision of the Gujarat High Court, the Court highlighted that expenses supplementing an existing business and improving efficiency should be treated as revenue expenditure. Conversely, expenses for establishing a new venture may be considered capital. The Court concurred with the Gujarat High Court's view, concluding that the expenditure in question qualified as revenue expenditure under Section 37(1) of the Income Tax Act.

In light of the detailed analysis and findings by the lower authorities, the High Court dismissed the appeals, affirming that the expenditure in question was rightly treated as revenue expenditure under Section 37(1) of the Income Tax Act.