(Per : HONOURABLE MR. JUSTICE AKIL KURESHI)
1. These appeals pertaining to different assessment years involve the same respondent assessee. The question of law involved also is identical. We have, therefore, heard these appeals together and dispose off the same by this common judgment.
2. For the purpose of this judgment, we may notice the facts arising in Tax Appeal No.74/2003. The assessment year involved is 1987-88. The assessee is a manufacturer. For the purpose of its manufacturing activities, the assessee had acquired technical know-how and claimed deduction thereof on the entire amount paid to a foreign company for supply of such technical know-how which expenditure was expended during the year under consideration. The Assessing Officer was of the opinion that such expenditure should be treated as covered under section 35AB of the Income Tax Act, 1961 ('the Act', for short). To such proposal, the assessee made detailed submissions before the Assessing Officer contending inter alia that under the agreement, the assessee company acquired only a limited right to use such know-how. All information and know-how furnished by the foreign company remained the property of such company. Such know-how was used in respect of the existing items manufactured by the company and not for new items. The assessee, therefore, contended that such expenditure was revenue in nature and would not be covered by the provisions of section 35AB of the Act.
3. The Assessing Officer, however, did not accept the contention of the assessee. He was of the opinion that section 35AB of the Act nowhere provided that only such expenditure where the right over technical know-how is exclusively obtained or that it should be used for manufacture of new items, would be covered under the said provision. The Assessing Officer was of the opinion that as such expenditure for acquiring technical know-how was for the purpose of business of the assessee, the assessee would be entitled to deduction of only 1/6th payments during the year under consideration as provided in section 35AB of the Act.
4. The assessee appealed against such decision of the Assessing Officer. C.I.T. (Appeals) rejected the appeal. In a brief order, the Appellate Commissioner recorded that having gone through the copy of the agreement and the technical know-how, he found that the same was capital expenditure used for production and would, therefore, fell within the provisions of section 35AB of the Act.
5. In further appeal, the Income Tax Appellate Tribunal ('the Tribunal', for short) reversed the decisions of the revenue authorities primarily relying on its earlier decision in the case of the same assessee for the assessment year 1989-90. The revenue, therefore, has filed these appeals.
6. At the time of admission of the appeals, this court had framed the following substantial question of law:-
"Whether use of the know-how for the purpose of business under a license for a temporary period would amount to acquiring know-how for lumpsum consideration for the purposes of the business of the assessee within the meaning of section 35AB of the Income Tax Act, 1961 and was the Appellate Tribunal right in law and on facts in deleting the disallowance made under Section 35AB of the Act?"
7. We may record that the judgment of the Tribunal in case of this assessee touching the very same issue pertaining to assessment year 1989-90 came up for consideration before this court in Revenue's Tax Appeal No.326/2000. In such appeal, the third question which was framed at the time of admission pertains to the expenditure of technical know-how. The expenditure of the said year also was with respect to the same nature of know-how under same agreement and the know-how was purchased from the same foreign company with which the present year is also concerned. In fact, the counsel for the revenue pointed out that in the assessment year 1987-88, the assessment which was previously framed was reopened on the basis of the additions made under section 35AB of the Act for the assessment year 1989-90.
8. It can, thus, be seen that in all respects, the expenditure under consideration was identical in nature. The Tribunal, in its detailed judgment for the assessment year 1989-90, had held that the expenditure was revenue in nature. In the said year, of course the Assessing Officer as well as the C.I.T. (Appeals) had proceeded on the basis that the expenditure was revenue in nature. Slight point of distinction in the present case, therefore, would be that C.I.T. (Appeals) had in his brief discussion come to the conclusion that the expenditure was capital. We may record that the Assessing Officer had not come to any definite finding on this aspect. Be that as it may, the C.I.T. (Appeals)'s order was carried before the Tribunal and the Tribunal relying on and referring to its own decision in case of this very assessee concerning the same expenditure made under the same agreement held that the revenue authorities were not justified in applying section 35AB of the Act to the expenditure in question.
9. In our decision dated 3-7-2012 rendered in Tax Appeal No.326/2000, we had upheld the Tribunal's view in case of this very assessee pertaining to assessment year 1989-90 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. When in an identical situation, governing the same assessee and pertaining to the same expenditure arising out of the same agreement, we have upheld the decision of the Tribunal on non-applicability of section 35AB of the Act, we see no reason to take a different view in the present set of appeals in which the Tribunal had relied on its earlier judgment for the same assessee in the assessment year 1989-90.
11. In the result, the question is answered in the negative, i.e. against the revenue and in favour of the assessee. All tax appeals stand dismissed.
( Akil Kureshi, J. ) ( Harsha Devani, J. ) hki Top