2015 (6) TMI 105 - HC - Income Tax

Payment of technical know how - ITAT deleting the disallowance u/s 35AB - whether provisions contained in section 35AB would cover also revenue expenditure? - Held that - As Apex Court in Commissioner of Income Tax v. Swaraj Engines Ltd. 2008 (5) TMI 257 - SUPREME COURT decision would suggest that for determining whether certain expenditure would fall within section 35AB or not, it would be important to examine the nature of the expenditure. If it is found that the same is revenue in nature, the question of applicability of section 35AB of the Act would not arise. On the other hand, if it is found to be capital in nature, then the question of amortization and spreading over, as contemplated under section 35AB of the Act would come into play. The provisions of section 35AB of the Act can apply only in case of capital expenditure and of course, provided the conditions set out therein are fulfilled. In such a case, during the period when section 35AB remained in operation, the assessee could claim benefit thereof. However, such provision would not apply to a revenue expenditure even if the same was incurred for acquisition of technical knowhow. Deduction on such expenditure was available even before the introduction of section 35AB of the Act and such deduction cannot be curtailed or limited by applying section 35AB. In that view of the matter, taking such an expenditure out of section 37(1) of the Act, would not arise.Before closing, we may clarify that in the present case, the Assessing Officer himself proceeded on the basis that the expenditure was revenue in nature. In that view of the matter, the interpretation that we have adopted would apply and the case of the assessee would not fall under section 35AB of the Act. - Decided in favour of the assesse.

Summary

Issues Involved:
1. Applicability of Section 35AB of the Income Tax Act, 1961.
2. Nature of expenditure (capital or revenue) for acquiring technical knowhow.
3. Allowability of deductions under Section 37 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of Section 35AB of the Income Tax Act, 1961:
The core issue in these appeals was whether the expenditure incurred for acquiring technical knowhow fell under Section 35AB of the Income Tax Act, 1961. The court referred to a previous decision in Tax Appeal No.326 of 2000, which had already concluded that Section 35AB applies only to capital expenditures. The court reiterated that Section 35AB, introduced to encourage indigenous scientific research, allows for a deduction spread over six years for lump sum payments made for acquiring knowhow. However, it was clarified that this provision is enabling, not disabling, and does not restrict existing benefits under Section 37 for revenue expenditures.

2. Nature of Expenditure (Capital or Revenue) for Acquiring Technical Knowhow:
The court examined whether the expenditure for acquiring technical knowhow was capital or revenue in nature. It was noted that the Assessing Officer had classified the expenditure as revenue in nature. The court referred to the Supreme Court's decision in Commissioner of Income Tax v. Swaraj Engines Ltd., which emphasized that the nature of the expenditure must be determined first. If the expenditure is revenue in nature, Section 35AB does not apply. The court also highlighted that the expenditure in question was for the use of knowhow for a limited period, without transferring ownership, thus classifying it as revenue expenditure.

3. Allowability of Deductions under Section 37 of the Income Tax Act, 1961:
The court discussed whether the expenditure, being revenue in nature, could be claimed under Section 37 of the Income Tax Act, 1961. It was concluded that Section 35AB does not limit the benefits available under Section 37 for revenue expenditures. The court reiterated that revenue expenditures for acquiring technical knowhow, which were deductible under Section 37 before the introduction of Section 35AB, remain deductible and are not curtailed by Section 35AB.

Conclusion:
The court concurred with the findings of the earlier Division Bench and concluded that the issues were already settled by the judgment in Tax Appeal No.326 of 2000. Therefore, the substantial questions of law were answered in favor of the assessees and against the Revenue. The appeals were dismissed accordingly.