2012 (9) TMI 299 - SC - Income Tax

Technical Assistance Agreement - Acquiring of know-how - deduction u/s 37 OR amortized u/s 35AB - Held that - As directed to assessee in his own case in CIT Versus Drilcos (India) Pvt. Ltd. 2003 (12) TMI 32 - MADRAS HIGH COURT payment was required to be considered only u/s 35AB & not entitled to have the amount paid for acquiring know-how as an item of revenue expenditure allowable as a deduction u/s 37. As Section 35AB says that the expenditure should have been incurred for the purposes of the business of the assessee, in the present case, the Technical Assistance Agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once Section 35AB of the Act comes into play, then Section 37 of the Act has no application - against assessee.

Summary

Issues:
- Claim of deduction under Section 37 of the Income Tax Act, 1961 for an amount paid for acquiring know-how.
- Applicability of Section 35AB of the Income Tax Act, 1961 in the case.
- Interpretation of the concept of amortization of expenditure under Section 35AB.
- Determination of whether the expenditure was incurred for the purposes of the business of the assessee.
- Clarification on the application of Section 37 of the Act in relation to Section 35AB.

Analysis:
The case involved a civil appeal concerning the Assessment Year 1993-1994, where the assessee, engaged in manufacturing mining equipment, entered into a "Licence and Technical Assistance Agreement" with an American company for the transfer of technical know-how. The agreement required the payment of US $2,25,000 in three installments, with the first installment of Rs.17,49,889 paid in convertible Indian currency. Disputes arose, and the know-how was not transferred by the American company.

The primary issue was whether the amount paid could be claimed as a deduction under Section 37 of the Income Tax Act, 1961. The Department rejected the claim but allowed the expenditure to be amortized under Section 35AB. The contention was that Section 35AB was not applicable, which was dismissed by the court. Section 35AB allows for the amortization of expenditure incurred for acquiring know-how for business purposes over a specified period.

The court emphasized the concept of expenditure being incurred "for" the business of the assessee when interpreting Section 35AB. It clarified that once Section 35AB comes into play, Section 37 has no application. The court highlighted that the Technical Assistance Agreement was entered into for acquiring know-how to be used in the business of the assessee, aligning with the requirements of Section 35AB. Therefore, the court found no error in the judgment of the High Court and dismissed the civil appeal filed by the assessee.

In conclusion, the court upheld the applicability of Section 35AB in the case, emphasizing the importance of expenditure being incurred for business purposes. The judgment clarified the relationship between Section 37 and Section 35AB of the Income Tax Act, 1961, providing a comprehensive analysis of the legal provisions and their interpretation in the context of the case.