TMI Blog2012 (7) TMI 988X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in directing the assessing officer to allow deduction of expenses amounting to ₹ 1,64,512/- under section 37(4), in respect of guest house expenses? [2] Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of ₹ 1,16,219/- made under section 37(3) read with rule 6D of the Income Tax Rules? [3] Whether the Appellate Tribunal is right in law and on facts in deleting the disallowance of ₹ 23,23,880/- made under section 35AB read with section 37 of the Act? 2. Insofar as the question No.1 is concerned, it arises out of the decision of the Tribunal deleting the disallowance confirmed by CIT (Appeals) of ₹ 1,64,512/- under section 37(4) of the Income Tax Act, 1961 ( the Act for short) as guest house expenses. The expenses incurred by the assessee towards guest house charges included rent on guest house, food, beverages etc., as also depreciation on furniture and fixtures, salary of staff and electricity expenses. The CIT (Appeals) allowed the depreciation on furniture and fixtures, but confirmed the disallowance of the remaining expenses. The issue was carried in appeal by the assessee before the Tribunal. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the Tribunal committed serious error in deleting the disallowances made by the Assessing Officer and confirmed by the CIT (Appeals). He placed reliance upon a decision of Division Bench of the Delhi High Court in the case of Bharat Commerce Industries Ltd. v. Commissioner of Income Tax, reported in 119 TAXMAN 560, wherein interpreting section 37(3) of the Act and rule 6D of the Rules, the High Court held that there was no provision in rule 6D(2) to break the period of tour outside headquarters into two portions, one relating only to traveling and the second relating only to actual stay at the place of destination. The High Court was of the opinion that the limitations provided in rule 6D(2) of the Rules cover the entire expenditure incurred by an employee both on actual travelling as well as during the period of the stay at any particular place for the purpose of business. 6. On the other hand, learned counsel Shri Manish Shah for the respondent assessee opposed the ground of appeal of the revenue contending that the Tribunal has correctly applied the statutory provisions. Looking to the nature of expenditure, the same were not required to be limited and were n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Tribunal's ultimate conclusion being largely factual, we are not inclined to remit this issue for further consideration and terminate it here. 9. Subject to above observation, we answer the question in affirmative, that is, against the revenue and in favour of the assessee. 10. This brings us to the last remaining but elaborately argued question. The issue pertains to application of section 35AB of the Act and arises in following factual background. The assessee, a company engaged in manufacturing of starch and other similar products, during the year under consideration relevant to assessment year 1989-90, paid a sum of ₹ 20,35,335/- and described it as technical know-how fees. The assessee further expended a sum of ₹ 2,88,545/- and described as technical service fees. Thus, total sum of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness for a limited period. The Tribunal noted that undisputedly, there was no purchase of the same from the foreign company. The Tribunal thereafter noted several decisions on the issue whether payment made for right to use or access to technical knowledge could be treated as revenue or capital expenditure. The Tribunal in its concluding portion, proceeded to allow the assessee's appeal holding that the case of the assessee was not covered under section 35AB of the Act. The Tribunal made following observations : 8. In the case before us, we have already noticed that according to the assessee, it had not purchased or obtained ownership of the technical know-how from the foreign company. On the other hand, the assessee is only a licensee by which it can use the know-how for the purpose of its business 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing. He submitted that the assessee acquired the know-how for a limited period and never enjoyed any ownership or domain right over such technicality. The know-how was utilized for manufacturing of its existing items, neither new manufacturing unit was established nor new item of manufacturing was introduced. 17.1 Counsel pointed out that even the Assessing Officer who agreed that the expenditure in question was a revenue expenditure. CIT (Appeals) did not disturb this finding. TheTribunal gave detailed reasons to hold that the expenditure was revenue in nature. 17.2 Counsel, therefore, submitted that if that be so, section 35AB of the Act would have no applicability since such provision was made as an enabling provision and not for limiting the benefits which were already existing. In this respect, counsel drew our attention to the C.B.D.T. Circular No.421 dated 12.6.1985 wherein with respect to deduction in respect of expenditure of know-how, 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 Income-tax Act. 17.3 Counsel placed heavy reliance on the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid 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 bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. 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. 24. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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