Ms. Sonia Gokani, J. - In the present Appeal preferred under section 260A of the Income-tax Act, 1961 [hereinafter referred to as "Act" for short] challenge is made to the impugned Order of the Income Tax Appellate Tribunal, Ahmedabad ["Tribunal" for short] dated 01.03.2000 rendered in ITA No.3106/Ahd/1992 for A.Y 1989-90, proposing the following substantial questions of law for our consideration :
| "(A) |
Whether, the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to allow relief to the assessee holding that technical know-how fees of Rs.24,04,000/- as allowable expenses under Section 37(1) of the Act?" |
2. We have heard Mrs. Mauna Bhatt, learned counsel for the appellant-Revenue and learned advocate Mr. Shah appearing for the respondent- assessee.
3. The assessee-Company claimed technical know-how fees of Rs.24,04,000/- in the Profit & Loss Account. The Assessing Officer, after detailed consideration of such expenditure, held this to be revenue in nature. It also held that the assessee' s request for applying Section-37 is also incorrect. The expenses of technical know-how is covered by the provision of Section-35AB of the Act and there would not arise question of applicability of provision of Section-37 of the Act and accordingly, such technical know-how is added to the total income of assessee.
4. The same was challenged before the Commissioner of Income Tax (Appeals). The CIT(A) confirmed the view of the Assessing Officer by holding thus: —
"13... I have carefully considered the facts of the case and submission of the learned counsel of the appellant. I am inclined to agree with the contention of the Assessing Officer that the word 'know-how' has been given a very wide meaning by Explanation to Section-35AB. As per explanation 'know-how' means any industrial information or technique likely to assist in the manufacture of proceeding of goods or in the working of mine, oil well etc. It is important to note that even the wordings of Section-37, Sub-section (1) suggest wide meaning to word process know-how, insofar as the word 'Any' has been reduced. I would, therefore, hold that the Assessing Officer was fully justified in not allowing entire claim and restrictions the deduction under provision of Sec.35AB. The addition made by the Assessing Officer is hereby confirmed."
5. The assessee challenged the same before the Tribunal and the Tribunal followed its own decision rendered in the case of Dy. CIT v. Sayaji Industries Ltd. [2013] 81 DTR 418 (Guj.). The Tribunal also examined the agreement entered into by the assessee with the foreign company and discussing various clauses, it concluded in favour of the assessee and directed the Assessing Officer to grant relief by holding such expenditure as allowable under Section-37(1) of the Act. Resultantly, the present substantial question of law for our consideration. The issue is no longer res integra.
6. We noticed at the time of admission also that predominantly the issue involved in the present appeal and in Tax Appeal No.326 of 2000 is identical.
The Tribunal also had followed its own decision of the Sayaji Industries Ltd. case (supra) which when came up for consideration before this Court, decided the same answering the question against the revenue and in favour of the assessee, by also taking into consideration the decision of the Apex Court rendered in the case of CIT v. Swaraj Engines Ltd., [2009] 309 ITR 443/[2008] 171 Taxman 495 holding thus:—
"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 section 35AB of the Act and therefore, not allowable deduction under section 37(1) of the Act. The Tribunal noted the nature of such expenditure. Significant features thereof were that the assessee had not purchased or obtained ownership of such technical know-how from the foreign company. The assessee was merely a licensee under which license it could use a know-how for the purpose of its business temporarily. For such acquisition of know-how, the assessee paid lump sum payment. It had also come on record before the Tribunal that such technical know-how 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 know-how. (1) Subject to the provisions of sub-section (2) , where the assessee has paid in any previous year 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 equal instalments for each of the five immediately succeeding previous years.
[2] Where the know-how referred to in sub-section (1) is developed in a laboratory, university or institution referred to in sub-section (2B) of section 32A, one-third of the said lump sum consideration paid in the previous year by the assessee shall be deducted in computing the profits and gains of the business for that year, and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years.
Explanation — For the purposes of this section, "kno-whow" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto)."
19.1 Sub-section (1) of section 35AB of the Act provides for a deduction for any lump sum payment made by the assessee for acquiring any know-how 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 one-sixth 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 CIT v. JCT Electronics Ltd., [2008] 301 ITR 290. In that case, the assessee had claimed a deduction of a sum of Rs.26.65 lakh (rounded off) paid to one M/s Kirloskar Oil Engines Ltd. As royalty on the basis of an agreement for the purpose of acquiring technical know-how for the manufacturing of diesel engines. The Assessing Officer was of the opinion that such expenditure was covered under section 35AB of the Act and the same could not be treated as a revenue expenditure. After considering the assessee's reply, the Assessing Officer applied section 35AB of the Act to such expenditure. The assessee approached the Commissioner (Appeals) against such a decision contending that under the said agreement, the assessee had not become the owner of the technical know-how 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 know-how 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 know-how. Such precondition was not satisfied. On this basis, the High Court dismissed the appeal. It was this decision of the High Court which came up for consideration before the Apex Court in the case of Commissioner of Income Tax v. Swaraj Engines Ltd. (supra). The Apex Court observed that, "At the same time, it is important to note that even for the applicability of section 35AB, the nature of expenditure is required to be decided at the threshold because if the expenditure is found to be revenue in nature, then section 35AB may not apply. However, if it is found to be capital in nature, then the question of amortization and spread over, as contemplated by section 35AB, would certainly come into play.". With the above observations, the Apex 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 decision under challenge before the Supreme Court had not given any clear finding on this aspect though the Tribunal had confirmed the view of the CIT (Appeals) that the expenditure was revenue in nature. It was precisely for this reason that the Apex Court remanded the proceedings for authoritatively declaration on this point by the High Court.
22. In addition to the decision of the Apex Court in the case of Commissioner of Income Tax v. Swaraj Engines Ltd. (supra), we also would like to place reliance on the clarificatory 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 hitherto not available to the manufacturers while incurring expenditure for acquisition of technical know-how. 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 know-how which was available as deduction under section 37(1) of the Act, was never meant to be taken away or limited by introduction of section 35AB of the Act. In the Ninth Edition, Volume-I of Palkhivala, while explaining the provisions of section 35AB of the Act, following has been observed :
"This section allows deduction, spread over six years, of a lump sum consideration paid for acquiring know-how for the purposes of business even if later the assessee's project is abandoned or if such know-how subsequently becomes useless or if the same is returned. The section, which is an enabling section and not a disabling one, should be confined to that consideration which would otherwise be disallowable as being on capital account. A payment for acquiring know-how or the use of know-how which is one revenue 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 know-how. 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 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. In a given case, if the expenditure is held to be capital in nature, further question of applicability of section 35AB of the Act may arise. In essence, therefore, each case would have to be examined separately and on the strength of material on record. Learned counsel Shri Patel however requested that the matter be remanded to the Assessing Officer for consideration whether the expenditure was capital or revenue in nature. We find that when the Assessing Officer had himself held that it is revenue expenditure, there would be no purpose of such a remand.
26. In the result, the third question is answered in the negative, that is, against the revenue and in favour of the assessee. Appeal is allowed in part and disposed of accordingly."
7. In light of the above pronouncement, when the facts and circumstances of the case are examined, we noticed that the Assessing Officer had proceeded on the basis that the expenditure was revenue in nature. The CIT [A] also concurred with such findings of the Assessing Officer. As lastly noted in the case of Sayaji Industries Ltd. (supra) in each case, it would be necessary to gather whether the expenditure was capital on revenue in nature. As there is no dispute in respect of nature of expenditure, the issue proposed it. The present appeal also requires to be answered in favour of the assessee and against the Revenue. The Tax Appeal is accordingly disposed of.