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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 ..... Appeal No.158 of 2001 filed its return on 29.12.1993, declaring total income of Rs. 7,46,408/for the Assessment Year 199394. The assessee of Tax Appeal No.361 of 2001 filed its return on 31.12.1992, declaring total income of Rs. 2,10,01,369/for the Assessment Year 199293. The assessments were taken under scrutiny and the Assessment Officer vide its order, determined the total income of assessee of Tax Appeal No.453 of 1999 at Rs. 88,09,460/. The assessee of Tax Appeal No.158/2001 at Rs. 27,01,014/and the assessee of Tax Appeal No.361 of 2001 at Rs. 2,75,88,228/. 5. Being aggrieved by the orders passed by the A.O., Appeals were preferred before the CIT(A). By order dated 29.04.1994, in the first matter, the appeal was allowed in part, in second matter vide order dated 29.02.1994 the appeal was allowed and in third matter vide order dated 30.09.1994 the appeal was partly allowed by the respective CIT(A)s. Against the said orders of CIT(A), appeal was preferred before the Appellate Tribunal. By impugned judgment and order dated 01.12.2000 in first two appeals the Appellate Tribunal dismissed the appeal filed by the Revenue and by order dated 19.04.2001 in the third one, the Appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical service fees. Thus, total sum of Rs. 23,23,880/of expenditure incurred by the assessee, of which the assessee claimed total deduction as a revenue expenditure, came up for consideration before the Assessing Officer. The Assessing Officer was of the opinion that such expenditure would fall within section 35AB of the Act. The assessee when called upon by the Assessing Officer, contended that the provisions of section 35AB of the Act are applicable only in respect of capital expenditure and not in respect of revenue expenditure. The assessee further contended that the company while acquiring such knowhow, obtained no ownership right on such information and knowhow was furnished by the foreign company to the assessee under an agreement. The assessee also contended that such technical knowhow was for the purpose of production of its existing items which are being manufactured by the assessee company since many years. 11. The Assessing Officer, however, did not accept the contentions of the assessee. He though agreed that such expenditure was revenue in nature, was of the opinion that the same would be covered within section 35AB of the Act. The assessee, therefore, could not claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s temporarily for which the lump sum payment has been made. Therefore, the present case is not covered by the provision of section 35AB as rightly held by the Tribunal, Calcutta Bench. Therefore, considering the entire circumstances of the case, we are of the view that section 35AB has no application in the present case and the assessee is entitled to deduction u/s 37(1) of the Act." 15. It is this view of the Tribunal which is under challenge at the hands of the revenue. Learned counsel Shri Varun Patel for the revenue vehemently contended that the Tribunal committed grave error in allowing the assessee's appeal. He submitted that section 35AB of the Act is widely worded and includes any expenditure incurred for acquisition of technical knowhow. Concept of ownership here is not material. He further submitted that once an expenditure, whether revenue or capital, is covered under section 35AB of the Act, by virtue of very language of subsection (1) of section 37 of the Act, the assessee cannot claim any benefit thereof under section 37 of the Act. 16. In support of his contentions, counsel placed heavy reliance on the decision of the Madras High Court in the case of Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the C.B.D.T. Circular No.421 dated 12.6.1985 wherein with respect to deduction in respect of expenditure of knowhow, it was clarified that, "With a view to providing further encouragement for indigenous scientific research, the Finance Act, 1985, has inserted a new section 35AB in the Incometax Act." 17.3 Counsel placed heavy reliance on the decision of the Apex Court in the case of Commissioner of Income Tax v. Swaraj Engines Ltd., (2009) 309 ITR 443 in which the Apex Court had an occasion to examine the decision of Punjab & Haryana High Court on the question of applicability of section 35AB of the Act. To this decision, we would revert at a latter stage. 18. From the submissions made before us, central question that calls for our consideration whether in fact the revenue is justified in applying section 35AB of the Act, or whether the assessee, as held by the Tribunal, was correct in contending that the said provision would have no application. Before going to such question, we may recall that the Assessing Officer, in clear terms, held that the expenditure was revenue in nature. CIT (Appeals) did not disturb this finding, but proceeded to hold that the same would be hit by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto)." 19.1 Subsection (1) of section 35AB of the Act provides for a deduction for any lump sum payment made by the assessee for acquiring any knowhow for use for the purpose of its business. Such deduction, however, was to be spread over a span of six years, during each of the six years starting with the year when such expenditure was incurred, the assessee being eligible for deduction of the onesixth of the total expenditure. 20. The moot question is whether such provisions contained in section 35AB of the Act would cover also revenue expenditure. In this context, we may peruse the decision of the Apex Court in case of Commissioner of Income Tax v. Swaraj Engines Ltd. (supra) more closely. The said decision was rendered in an appeal filed by the revenue challenging the decision of the Punjab & Haryana High Court in the case of Commissioner of Income Tax v. JCT Electronics Ltd., reported in (2008) 301 ITR 290 (P&H). In that case, the assessee had claimed a deduction of a sum of Rs. 26.65 lakhs (rounded off) paid to one M/s Kirloskar Oil Engines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pex Court proceeded to remand the matter before the High Court observing that such question needs to be decided authoritatively by the High Court as it was an important question of law, particularly, after insertion of section 35AB. 21. This decision is significant for our purpose and we have taken note of the background leading to the appeal before the Apex Court due to such reason. The Apex 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. It was in this background that the Apex Court desired that this question, that is, the question of the nature of expenditure, whether revenue or capital, be first decided before final answer to the applicability or otherwise of section 35AB could be given. We may recall that the Punjab & Haryana High Court in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue account is allowable under section 37, and does not attract the application of this section at all." 23. To our mind, therefore, 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. 24. We are unable to concur with the view of the Madras High Court in case of Commissioner of Income Tax v. Tamil Nadu Chemical Products Ltd. (supra), which was in any case rendered prior to the decision of the Apex Court in the case of Commissioner of Income Tax v. Swaraj Engines Ltd. (supra). 25. Before closing, we may clarify that in the present case, the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X
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