High Court rules on tax deductions for design expenses under Income Tax Act

The High Court of Madras ruled in a tax case regarding the allowability of expenditure for the purchase of design and drawings under the Income Tax Act. The Court held that the payment for designs and drawings constituted technical know-how, falling under Section 35AB for deduction, overruling the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal. However, the consultancy charge for a market survey was deemed a business expenditure under Section 37(1). The Court partially allowed the Tax Case Appeal, siding with the Revenue on the payment for designs and drawings and with the assessee on the consultancy charge.

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Issues:
1. Allowability of expenditure for the purchase of design and drawings under Section 37(1) or Section 35AB of the Income Tax Act.

Analysis:
The High Court of Madras addressed the issue of whether the amount paid by the assessee for the purchase of design and drawings is an allowable expenditure under Section 37(1) or for deduction under Section 35AB of the Income Tax Act for the assessment year 1990-91. The assessee had paid a total amount of Rs. 11,39,195, with Rs. 10,39,195 paid to a company in Switzerland for designs and drawings and Rs. 1,00,000 paid to a consultancy in Bombay. The Assessing Officer treated the amounts as expenditure for obtaining technical know-how and applied Section 35AB, allowing only a portion as deduction. The Commissioner of Income Tax (Appeals) reversed this decision, allowing the entire amount under Section 37(1) citing the consultancy charge as a business expenditure. The High Court noted that the Tribunal did not consider Section 35AB and its explanation, which mandates deductions for acquiring know-how. The Court referred to Section 35AB and relevant case law to determine that the payment for designs and drawings falls under technical know-how, thus attracting Section 35AB. The Court upheld the Assessing Authority's decision overruling the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal.

The Court also addressed the consultancy charge of Rs. 1,00,000, confirming the Income Tax Appellate Tribunal's decision to treat it as a business expenditure under Section 37(1) since it was for a market survey of raw materials, not related to acquiring know-how for manufacturing or processing goods. The Court cited the introduction of Section 35AB in 1986, rendering previous case law irrelevant. Consequently, the Court partly allowed the Tax Case Appeal, ruling in favor of the Revenue regarding the payment for designs and drawings falling under Section 35AB and in favor of the assessee for the consultancy charge being a business expenditure under Section 37(1).

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