(Per : HONOURABLE MR. JUSTICE AKIL KURESHI) 1. Revenue has challenged the judgment of the Income Tax Appellate Tribunal ('the Tribunal', for short) dated 12-4- 2001. The issue pertains to deduction claimed by the assessee for the expenditure on technical consultancy fees. Revenue contends that such expenditure should be treated as provided under section 35AB of the Income Tax Act, 1961 ('the Act', for short). The Tribunal upheld the view of C.I.T. (Appeals) and rejected the revenue's appeal and hence, this present tax appeal before us.
2. At the time of admission of the appeal, the following substantial question of law was framed:-
“Whether the ITAT has substantially erred in law and on facts in treating the technical consultancy fees of Rs.5,86,277/- as revenue expenditure of the year when the provisions of Section 35AB were clearly applicable?”
3. In the order admitting appeal itself, it was recorded that revenue's appeal raising identical question being Tax Appeal No.326/2000 is admitted and is pending.
4. We may briefly record the facts. During the previous year relevant to the assessment year 1990-91, the assessee had incurred expenditure of Rs.5,86,277/- towards technical consultancy charges. The assessee claimed deduction thereon as miscellaneous expenditure. The Assessing Officer, however, called upon the assessee to justify such claim to which the assessee contended that such expenditure was for technical consultancy fees paid to a technical consultant for expansion of the existing business. Such expenditure, therefore, is revenue in nature. The assessee also contended that the same being a revenue expenditure would not come within the purview of section 35AB of the Act.
5. The Assessing Officer, however, was of the opinion that deduction of such expenditure can be of only 1/6th of the amount actually expended during the year under consideration as provided under section 35AB of the Act and the rest of the deduction can be claimed in the later years. He, however, did not decide whether the expenditure was revenue or capital in nature since in his opinion, such issue was not relevant for the purpose of section 35AB of he Act.
6. The assessee carried the matter in appeal. C.I.T. (Appeals) in the appellate order held that expenditure was revenue in nature. He noted that under the agreement, the entire emphasis was on the improvement of existing production line, increase in yield, lowering the labour expenses and possibility of export. He noted that there was no mention of any expansion or new plant or new product in the said agreement. He, therefore, held that the expenditure which was for the improvement of the existing work was revenue expenditure and, therefore, would not be covered under section 35AB of the Act.
7. The revenue carried the matter in appeal. The Tribunal rejected the revenue's appeal relying on the decision of Delhi Bench of the Tribunal in the case of C.I.T. vs. Goodyear India Ltd., 73 ITD 189 In which it appears to have been held that section 35AB would apply only in case of capital expenditure.
8. We have heard learned counsel for the revenue. From the record, it clearly emerges that there was a definite finding of the C.I.T. (Appeals) that the expenditure was purely revenue in nature. With such finding we are not inclined to interfere since the Commissioner had given cogent reasons for such finding. He noted that under the agreement, technical consultancy was provided for the purpose of improvement in the existing production line and yield and lowering the labour expenditure. The entire emphasis was thus on improving the efficiency and not on any expansion or development of new product or setting up of a new plant. Thus, the Commissioner taking into account the relevant clauses of the agreement came to the conclusion that such expenditure did not result into any enduring benefit but was only for improving the existing efficiency of the assessee company.
9. Before us, though the revenue did contend that even if the expenditure is revenue in nature, such expenditure should be amortized as provided under section 35AB of the Act, in this respect, while dismissing the revenue's appeal in case of Sayaji Industries Ltd. in Tax Appeal No.326/2000, we had negatived such a contention making the following observations:-
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 installments 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 installments for each of the two immediately succeeding previous years.
Explanation – For the purposes of this section, “know-how” 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 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 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 pre-condition 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 pre-condition 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 hither to 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.
10. In the result, this tax appeal is dismissed answering the question in favour of the assessee and against the revenue.
( Akil Kureshi, J. ) ( Harsha Devani, J. ) hki