1993 (2) TMI 156 - AT - Income Tax

Business Expenditure, Capital Expenditure, Foreign Company, Revenue Expenditure, Technical Know-how

Summary

Issues:
1. Whether the technical know-how fees paid by the assessee should be allowed as revenue expenditure.
2. Whether the expenditure incurred for obtaining technology for improving the product manufactured by the assessee is a revenue or capital expenditure.

Analysis:
1. The second issue in this case pertains to the claim of the assessee regarding the technical know-how fees paid. The agreement with a foreign company involved the sale of documentation/know-how/drawings related to licensed products. The Assessing Officer and CIT (Appeals) considered the fee paid for know-how falling within the definition of section 35AB, allowing only 1/6 of the first installment as a deduction. The assessee argued that the expenditure was revenue in nature due to the quick obsolescence of the technology and lack of enduring benefits. However, the tribunal found that the expenditure was capital in nature as it provided the right to manufacture improved products for more than a year, indicating an enduring benefit beyond one year.

2. The tribunal analyzed the nature of the expenditure for obtaining technology to improve the manufactured product. The tribunal considered whether the expenditure was capital or revenue in nature. The agreement specified a lump sum payment for acquiring know-how, which was spread over six years as per section 35AB introduced by the Finance Act, 1985. The tribunal concluded that the expenditure was capital in nature, as it provided an enduring benefit beyond one year. The tribunal directed the deduction of 1/6 of the total amount paid as lump sum consideration in the current year, with equal deductions in the following five years. Additionally, the tribunal directed the reassessment of total income and tax demand, considering the implications of section 35AB and the fact that the provision was new and may not have been fully understood by the assessee.

Overall, the tribunal allowed the appeal, confirming the treatment of the expenditure under section 35AB and directing the correct deduction of the lump sum consideration paid by the assessee.