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TMI Blog2004 (9) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... by this court on May 8, 2000: "Whether on the facts and in the circumstances of the case and in law the Income-tax Appellate Tribunal was justified in holding that the provisions of section 35AB in respect of technical know-how expenses are not attracted as the same are of revenue nature, even though the provisions of section 35AB are applicable to technical know-how expenses irrespective of the facts whether the same are of revenue nature or of capital nature?" The facts insofar as they relate to answer the aforesaid question need mention in brief. The dispute in this appeal relates to the assessment year 1988-89. The respondent, i.e., the assessee is a limited company engaged in the business of manufacture and sale of moulded goods in plastics. The assessee commenced its business of manufacturing in 1988-89. The assessee has its one sister concern by name M/s. Bright Brothers Limited (another limited company). This sister company is also engaged in the same kind of manufacturing activity in which the assessee is engaged namely, manufacture of moulded goods of plastics. The sister concern sells their goods in the market under the brand name "Bright". On August 12, 1986, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction. The Assessing Officer by order dated March 18, 1991 held the payment to be in the nature of capital expenditure. The Assessing Officer then further held that notwithstanding the finding, recorded by him treating the expenditure to be in the nature of capital expenditure, the amount can be brought for deduction under sections 35A and 35AB because it is paid for acquiring patent rights, copyrights and technical know-how. Accordingly and in view of the alternative finding the Assessing Officer directed the deduction to be made as provided in sections 35A and 35AB. The assessee-respondent felt aggrieved by the aforementioned finding and filed appeal to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) by order dated August 22, 1994 allowed the appeal in part. While reversing the aforementioned finding of the Assessing Officer, the Commissioner of Income-tax (Appeals) held the payment to be in the nature of revenue expenditure. In other words, disagreeing with both the views taken by the Assessing Officer, the Commissioner of Income-tax (Appeals) held that the payment made by the assessee to its sister concern was revenue expenditure and hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly arises for consideration in this appeal is, whether the provisions of section 35AB are attracted in the facts of the case notwithstanding the finding recorded by the Tribunal that the payment in question made by the assessee to its sister concern is in the nature of revenue expenditure, or in other words notwithstanding the fact that the payment in question made by the assessee to its sister concern is regarded as revenue expenditure, whether the provisions of section 35AB are attracted for claiming deduction, or not. Section 35AB falls in Chapter IV of the Act which deals with computation of total income of an assessee. Section 35AB deals with the cases relating to expenditure on know-how. It reads as under: "35AB. Expenditure on know-how.-(1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year relevant to the assessment year commencing on or before the April 1, 1998, any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth 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 equa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee obtained the know-how for manufacture of goods from its sister concern and utilized it effectively in manufacturing the goods and its sale in the market. It is also not in dispute that a lump sum consideration of Rs. 1,03,742 was also paid by the assessee prior to April 1, 1998 to its sister concern for obtaining the use of know-how. In such circumstances, in our view, the requirements of section 35AB are satisfied. The question that may arise for consideration and the same was decided in favour of the assessee by the Commissioner of Income-tax (Appeals) and the Tribunal was whether it is a case of acquiring of a know how. In the opinion of the Tribunal, it is not and hence, section 35AB is not attracted. In our opinion, the use of the expression "acquiring" in section 35AB has to be given a liberal meaning rather than a strict one. In other words, in order to attract the rigour of section 35AB it may not be necessary for the assessee to actually become an absolute owner of the know-how. But if on payment of money consideration, an assessee is able to use the know-how to run his business then in such event, the requirement of section 35AB stands satisfied. Merely because act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cceeds and is allowed. The impugned order of the Tribunal insofar as it deals with the question referred to supra is set aside. The question framed is answered in favour of the Revenue (appellant) and against the assessee (respondent). It is answered that in the facts of this case, the provisions of section 35AB will apply. This takes us to the other two appeals being I.T.A. No. 41 of 1999 and I.T.A. No. 44 of 1999. These appeals arise out of the assessment years 1989-90 and 1990-91 respectively. In these two appeals, the following substantial questions of law are framed at the time of final hearing: Income-tax Appeal No. 41 of 1999: "1. Whether, on the facts and in the circumstances of the case and in law the Income-tax Appellate Tribunal was justified in holding that whatever expenditure was made on account of royalty payment was allowable as revenue expenditure? 2. Whether, on the facts and in the circumstances of the case and in law the Income-tax Appellate Tribunal was justified in allowing expenditure of Rs. 8,03,147 in assessment year 1989-90 and Rs. 7,38,840 in assessment year 1990-91 treated by the Assessing Officer as for non-business purpose, without giving any findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment made by the assessee was in the nature of revenue expenditure, yet the provisions of section 35AB ibid will apply.
In any event, in our opinion, keeping in view the law laid down by the 28 Supreme Court in the cases of CIT v. Ciba of India Ltd. [1968] 69 ITR 692; Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 ; CIT v. Avery India Ltd. [1994] 207 ITR 813 (Cal); CIT v. M. B. Umbrella Industries [1984] 145 ITR 292 (MP) and the nature of the agreement dated August 12,1986, the payments made by the assessee to its sister concern in the relevant assessment year are in the nature of revenue expenditure.
In the light of the aforesaid detailed discussion, question No. 1 framed in I.T.A. Nos. 41 and 44 of 1999 is answered against the Revenue and in favour of the assessee. Question No. 2 thus need not be answered being academic in nature. Question No. 3 is answered in favour of the Revenue and against the assessee.
As a result of the aforesaid discussion and in the light of the finding recorded by us on the questions framed, the appeal filed by the Revenue is partly allowed. The impugned order passed by the Tribunal is partly set aside.
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