2006 (5) TMI 58 - HC - Income Tax

Payment made for acquiring know-how services connected plant purchased by the assessee in Finland and installation of the same in India not deductible u/s 35AB tribunal is not justified in allowing deduction u/s 35AB tribunal observation that assessee would enjoy more depreciation than deduction claimed, hence allowing deduction u/s 35AB, is not justified amount paid on account of royalty and cess of royalty as a percentage of net selling price of licensed product, deductible u/s 37

Summary

Issues:
1. Whether royalty and cess of royalty paid as a percentage of net selling price of licensed product is a capital expenditure not allowable as a deduction under section 37 of the Income-tax Act.
2. Whether deduction under section 35AB was rightly allowed by the Tribunal even when the conditions for the claim were not fulfilled.

Analysis:

Issue 1:
The appeal by the Revenue was against the order of the Income-tax Appellate Tribunal, Chandigarh-B, regarding the deduction claimed by the assessee for royalty and cess of royalty paid. The assessee had claimed deductions totaling Rs. 1,76,93,000 and Rs. 59,02,295 for royalty payments and services connected with dismantling and installation of a plant, respectively. The Assessing Officer rejected these claims, but the Commissioner of Income-tax (Appeals) accepted them. The Tribunal, relying on a previous case, allowed the deduction. The High Court, based on the previous case, upheld the Tribunal's decision, stating that the assessee was entitled to the deductions.

Issue 2:
Regarding the second issue of deduction under section 35AB, the Assessing Officer had concluded that the payment made by the assessee did not fulfill the conditions for section 35AB. However, the Commissioner of Income-tax (Appeals) accepted the claim, which was further upheld by the Tribunal. The Tribunal found that the payments were for services rendered, not for acquiring know-how, and allowed the deduction under section 35AB. The Revenue argued that once the Tribunal found the claim not covered under section 35AB, it should not be allowed under any other provision. The High Court agreed with the Revenue, setting aside the Tribunal's decision and ruling in favor of the Revenue. The Court also mentioned that if the assessee is entitled to any other relief under different provisions of the Act, they can claim it accordingly.

In conclusion, the High Court upheld the deduction for royalty payments but denied the deduction under section 35AB, ruling in favor of the Revenue. The judgment emphasized the importance of adhering to the specific provisions of the Income-tax Act when allowing deductions and highlighted the need for claims to meet the prescribed criteria to be considered valid.