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TMI Blog2015 (6) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... ven 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. - TAX APPEAL NO. 453 of 2000 With TAX APPEAL NO. 158 of 2001 With TAX APPEAL NO. 361 of 2001 - - - Dated:- 24-11-2014 - MR. KS JHAVERI MR. K.J.THAKER, JJ. FOR THE APPELLANT : MR NITIN K MEHTA, ADVOCATE JUDGMENT : (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. The Tax Appeal No.453 of 1999 u/s.260A of the Incometax Act, 1961 is filed against the judgment and order of the Income Tax Appellate Tribunal passed in ITA No.3168/Ahd/1994. 2. The Tax Appeal No.158 of 2001 u/s.260A of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and allowable u/s 37 of the Act disregarding the special provisions of sec.35AB? While admitting Tax Appeal No.361 of 2001, following substantial questions of law arose for the determination of this Hon'ble Court; Whether, the Appellate Tribunal is right in law and on facts in holding that payment of technical know how was not hit by the provisions of section 35AB and thereby deleting the addition of ₹ 54,79,485/? 8. In Tax Appeal No.453 of 2000, following substantial question of law as proposed to be made for the determination of this Hon'ble Court; Whether, the Appellate Tribunal is right in law and on facts in deleting the disallowance of ₹ 1,24,512/made under section 35AB of the Act? 9. It appears that while admitting the matters, this Court had decided to hear these appeals altogether with TAX Appeal No.326 of 2000, wherein, identical question i.e. question No.3 was framed. 10. It has come to the notice of this Court that said Tax Appeal No.326 of 2000 has already been disposed of by this Court, in which the issue No.3, which is similar to the issue raised in these appeals, has already been concluded by a decision of this Court render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected the assessee's appeal. He was of the opinion that section 37(1) of the Act, which covers expenditure not being in the nature of the expenditure described in sections 32 to 36, would not apply in the present case by virtue of the provisions contained in section 35AB of the Act. He was of the opinion that since section 35AB of the Act makes a specific provision to treat the expenditure incurred for acquisition of technical knowhow by way of lump sum payment, even if such a payment was revenue in nature, would not fall within subsection (1) of section 37 of the Act. 14. Undeterred, assessee carried the matter before the Tribunal. The Tribunal by the impugned judgement reversed the decisions of the revenue authorities. The Tribunal noted that as per the agreement, all information and knowhow furnished by the foreign company remains the property of that company; the payment was made as a lump sum consideration to such foreign company for only use of the knowhow for the purpose of its running business for a limited period. The Tribunal noted that undisputedly, there was no purchase of the same from the foreign company. The Tribunal thereafter noted several decisions on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the M. P. High Court in the case of Commissioner of Income Tax v. Bright Automotives And Plastics Ltd., reported in (2005) 273 ITR 59. In the said decision, however, the principal question pertained to interpretation of term acquiring in section 35AB of the Act. The High Court opined that such term has to be given a liberal meaning and in order to attract the rigour of section 35AB of the Act, it may not be necessary for the assessee to actually become an absolute owner of the knowhow. The High Court also opined that for the purpose of said section, nature of expenditure whether revenue or capital, is of no consequence. 17. On the other hand, Shri Manish Shah, counsel for the respondentassessee opposed the appeal contending that the expenditure in question was purely revenue in nature. The same was, therefore, not covered under section 35AB of the Act. Such provision was made to encourage acquisition of knowhow to improve the quality and efficiency of Indian manufacturing. He submitted that the assessee acquired the knowhow for a limited period and never enjoyed any ownership or domain right over such technicality. The knowhow was utilized for manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowhow was used for the purpose of manufacturing the existing items which the assessee was manufacturing since years. In short, without saying so many words, the Tribunal also confirmed the view of the revenue authorities that the expenditure was revenue in nature. If that be so, the question arises whether deduction of such expenditure can be limited by applying section 35AB of the Act. 19. As already noted, as clarified by the CBDT circular dated 12.6.1985, such provision was made in the statute in Finance Act, 1995 (with effect from 1.4.1985) with a view to providing further encouragement for indigenous scientific research. Section 35AB of the Act, which was later on deleted with effect from 31.3.1999, reads as under: S. 35AB. Expenditure on knowhow. (1) Subject to the provisions of subsection (2), where the assessee has paid in any previous year any lump sum consideration for acquiring any knowhow for use for the purposes of his business, onesixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal installments for each of the five immediately succeeding pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee had not become the owner of the technical knowhow and no benefit of enduring nature had been received by the assessee. The CIT (Appeals) granted benefit to the assessee to the extent such expenditure represented the royalty calculated on the basis of the sales including excise duty and sales tax. The CIT (Appeals) held that such expenditure was revenue in nature and accordingly, allowed the assessee's appeal. The Department, thereupon, approached the Tribunal. The Tribunal rejected the revenue's appeal. The Tribunal referred to various clauses of the agreement between the assessee and the knowhow provider to hold that such expenditure was revenue in nature. When the matter reached the High Court at the hands of the revenue, the High Court rejected the appeal on a somewhat different ground. The High Court held and observed that effort of the revenue to bring the expenditure within the domain of section 35AB of the Act was totally misplaced since the precondition for application of section 35AB of the Act was that the payment had to be a lump sum consideration for acquiring any knowhow. Such precondition was not satisfied. On this basis, the High Court dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular issued by the C.B.D.T. bringing out the nature of the benefit being provided under section 35AB and the purpose for introduction of such provision in the statute. Such provision, as was clarified, was made with a view to providing further encouragement for indigenous scientific research. Thus, such statutory provision was made for making available the benefits which were hither to not available to the manufacturers while incurring expenditure for acquisition of technical knowhow. To the extent such expenditure was covered under section 35AB of the Act, amortized deduction spread over six years was made available. If such expenditure was capital in nature, prior to introduction of section 35AB of the Act, no such deduction could be claimed. With introduction of section 35AB, to encourage indigenous scientific research, such deduction was made available. Such a provision cannot be seen as a limiting provision restricting the existing benefits of the assessee. In other words, the revenue expenditure in the form of acquisition of technical knowhow which was available as deduction under section 37(1) of the Act, was never meant to be taken away or limited by introduction of se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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