2012 (4) TMI 129 - HC - Income Tax

Applicability of Section 35AB to expenditure incurred on preliminary survey resulting in agreement for transfer of technical know how Assessee company entered into agreement with foreign company for conducting preliminary survey, subsequently entered into collaboration agreement with same foreign company for transfer of technical know-how payment to be made in installments A.Y. 1994-95 - Held that -If a technical collaboration agreement were not to culminate as a result of the preliminary survey which was carried out for the assessee, obviously there would be no transfer of technical know-how. Therefore, CIT(A) and Tribunal have rightly held non-applicability of Section 35AB since amount was paid for preliminary survey and not for transfer of technical know-how. However allowable u/s 37. Further, though the payment for know-how was liable to be effected in installments, it was nonetheless a fixed sum which had been agreed between the parties and was, therefore, a lump sum within the meaning of Section 35AB expenditure on know-how eligible u/s 35AB Decided against the Revenue. Matter related to deletion of addition on valuation made by A.O, is restored back to Tribunal to decide afresh. Also, matter related to deduction of lease rent and depreciation on leased assets for computing eligible profits u/s 80HHC is restored back to A.O.

Issues Involved:
(A) Disallowance under Rule 6D
(B) Disallowance of pre-operative expenses
(C) Deduction of payment for technical know-how under Section 37 vs. Section 35AB
(D) Debenture issue expenses under Section 35D
(E) Expenses on electricity and water charges for properties given to Directors
(F) Premium paid on redemption of debentures as revenue expenditure
(G) Disallowance under Rule 6B
(H) Addition on valuation by A.O.
(I) Deduction of lease rent and depreciation on leased assets for 80HHC deduction

Detailed Analysis:

Issue (A): Disallowance under Rule 6D
The court noted that this question was covered by a previous decision rendered on 20 March 2012 in Income Tax Appeal No.189 of 2011 for Assessment Year 1990-91. Therefore, it was resolved in favor of the assessee and did not raise any substantial question of law.

Issue (B): Disallowance of Pre-operative Expenses
Similarly, Issue (B) was also covered by the same previous decision as Issue (A) and was resolved in favor of the assessee, not raising any substantial question of law.

Issue (C): Deduction of Payment for Technical Know-how under Section 37 vs. Section 35AB
The court examined the agreements between the assessee and two Italian companies for acquiring technical know-how. The first agreement dated 24 May 1993 was for a preliminary survey and not for the transfer of know-how. Therefore, the payment of US $ 2,00,000 was allowable under Section 37 and not under Section 35AB. The second agreement dated 1 October 1993 involved a transfer of know-how, and the CIT(A) correctly allowed a deduction of one-sixth of the total amount under Section 35AB. The court upheld these findings, affirming that the provisions of Section 35AB were not attracted to the first agreement, and thus, the Tribunal's decision was justified.

Issue (D): Debenture Issue Expenses under Section 35D
The Tribunal confirmed the CIT(A)'s order on this issue, and since there was no appeal by the Revenue on the CIT(A)'s findings, no substantial question of law arose.

Issue (E): Expenses on Electricity and Water Charges for Properties Given to Directors
The Tribunal also confirmed the CIT(A)'s order on this issue, and similar to Issue (D), no substantial question of law arose due to the absence of an appeal by the Revenue on the CIT(A)'s findings.

Issue (F): Premium Paid on Redemption of Debentures as Revenue Expenditure
This issue was covered by a previous decision rendered on 20 March 2012 in Income Tax Appeal No.188 of 2011 for Assessment Year 1992-93. Consequently, it was resolved in favor of the assessee and did not raise any substantial question of law.

Issue (G): Disallowance under Rule 6B
This question was covered by a decision rendered on 20 March 2012 in Income Tax Appeal No.1276 of 2009 for Assessment Year 1991-92. Therefore, it was resolved in favor of the assessee and did not raise any substantial question of law.

Issue (H): Addition on Valuation by A.O.
Both counsels agreed that this issue should be restored to the Tribunal for a fresh decision, following a judgment rendered on 20 March 2012 in Income Tax Appeal No.189 of 2011 for Assessment Year 1990-91.

Issue (I): Deduction of Lease Rent and Depreciation on Leased Assets for 80HHC Deduction
With the consent of both counsels, this issue was restored to the file of the Assessing Officer for a fresh decision.

Conclusion:
The appeal was disposed of with no order as to costs. Issues (A), (B), (F), and (G) were resolved in favor of the assessee based on prior judgments. Issues (D) and (E) did not raise substantial questions of law due to the absence of an appeal by the Revenue. Issue (C) was resolved affirmatively in favor of the assessee, affirming the Tribunal's decision. Issues (H) and (I) were remanded for fresh decisions by the Tribunal and the Assessing Officer, respectively.

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