2017 (6) TMI 554 - HC - Income Tax

Can deduction under section 35AB be claimed for acquiring knowhow even if manufacturing activity had not commenced - Held that - The assessee was engaged already in the business of manufacturing soap - In order to set up soda ash manufacturing plant, the assessee acquired technical knowhow by making lumpsum payment - thus setting up of the manufacturing facility of soda ash was by way of an extension of the existing business of the assessee of manufacturing soap - hence deduction under section 35AB cannot be denied - exemption to the extent of 1/6th of the expenditure incurred by the assessee by way of lumpsum payment towards consideration for acquiring technical knowhow for the use for business is granted - Decided in favor of revenue

Summary

Issues:
1. Interpretation of Section 35AB of the Income Tax Act regarding deduction for payment of technical knowhow.
2. Whether deduction under Section 35AB can be claimed when the business activity for which the knowhow was acquired has not commenced.

Issue 1: Interpretation of Section 35AB:
The High Court considered the appeal filed by the Revenue challenging the Income Tax Appellate Tribunal's judgment regarding the deduction under Section 35AB of the Income Tax Act. The Tribunal held that the essential requirements for claiming the deduction under Section 35AB were the payment for acquiring technical knowhow and the capability of using such knowhow for the business, regardless of whether it was actually put to use. The Revenue contended that the deduction should only be claimed from the profit and gain of the business for which the knowhow was acquired.

Issue 2: Commencement of Business Activity:
The case involved an assessee company engaged in manufacturing soaps, which had expended amounts for acquiring technical knowhow to set up a new manufacturing unit of soda ash. The Assessing Officer disallowed the deduction as the soda ash project had not commenced. The Tribunal, citing a previous decision, held that the business not starting was irrelevant for claiming the deduction under Section 35AB. The Court noted that the setting up of the soda ash plant was an extension of the existing soap manufacturing business, and therefore, the deduction could not be denied.

Conclusion:
The Court upheld the Tribunal's decision, emphasizing that the exemption under Section 35AB allowed for the deduction of technical knowhow expenses when certain conditions were met, irrespective of whether the knowhow was put to use immediately. As the setting up of the soda ash unit was considered an extension of the existing soap manufacturing business, the deduction could not be denied. The Court dismissed the Revenue's appeal and confirmed the Tribunal's judgment in favor of the assessee.