2012 (7) TMI 598 - HC - Income Tax

High Court rules technical consultancy fees as revenue expenditure, not under Section 35AB

DEPUTY COMMISSIONER OF INCOME TAX Versus RAJESH MALLEABLES LTD

The High Court ruled in favor of the assessee, holding that the technical consultancy fees were revenue expenditure and not subject to Section 35AB of the ... Deduction claimed for the expenditure on technical consultancy fees - Revenue contends that such expenditure should be treated as provided u/s 35AB - Held that:- Taking into account the relevant clauses of the agreement it can be concluded that such expenditure did not result into any enduring benefit but was only for improving the existing efficiency of the assessee company and was thus was purely revenue in nature - the nature of expenditure is found to be revenue in nature, then section 35AB may not apply - 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 and such deduction cannot be curtailed or limited by applying section 35AB - thus taking such an expenditure out of section 37(1) would not arise - in favour of assessee. Issues Involved:1. Treatment of technical consultancy fees as revenue expenditure.2. Applicability of Section 35AB of the Income Tax Act, 1961.Detailed Analysis:1. Treatment of Technical Consultancy Fees as Revenue Expenditure:The primary issue in this case was whether the technical consultancy fees of Rs. 5,86,277/- incurred by the assessee should be treated as revenue expenditure. The assessee argued that the expenditure was for technical consultancy fees paid for the expansion of the existing business, which should be considered revenue in nature. The Assessing Officer, however, did not make a determination on whether the expenditure was revenue or capital in nature, deeming the issue irrelevant for the application of Section 35AB of the Income Tax Act, 1961.The Commissioner of Income Tax (Appeals) [C.I.T. (Appeals)] held that the expenditure was revenue in nature. The C.I.T. (Appeals) emphasized that the agreement focused on improving the existing production line, increasing yield, lowering labor expenses, and exploring export possibilities. There was no mention of expansion, new plant, or new product, leading to the conclusion that the expenditure was for improving existing efficiency and did not result in any enduring benefit.The Tribunal upheld the C.I.T. (Appeals) decision, relying on the Delhi Bench's decision in the case of C.I.T. vs. Goodyear India Ltd., which held that Section 35AB would apply only to capital expenditure. The High Court noted that the C.I.T. (Appeals) had provided cogent reasons for classifying the expenditure as revenue in nature, and thus, there was no inclination to interfere with this finding.2. Applicability of Section 35AB of the Income Tax Act, 1961:The Revenue contended that even if the expenditure was revenue in nature, it should be amortized as provided under Section 35AB of the Act. The High Court referred to its previous decision in the case of Sayaji Industries Ltd., where it was held that Section 35AB would not apply to revenue expenditure. The High Court reiterated that the Assessing Officer had clearly held the expenditure to be revenue in nature, and the C.I.T. (Appeals) did not disturb this finding.The High Court examined the nature of the expenditure and the legislative intent behind Section 35AB. It noted that Section 35AB was introduced to encourage indigenous scientific research by providing an amortized deduction for lump sum payments made for acquiring know-how. The provision was not intended to limit existing benefits under Section 37(1) of the Act for revenue expenditure.The High Court also referenced the Supreme Court's decision in Commissioner of Income Tax v. Swaraj Engines Ltd., which clarified that the nature of the expenditure (revenue or capital) must be determined first. If the expenditure is revenue in nature, Section 35AB would not apply. The High Court concluded that Section 35AB applies only to capital expenditure, and revenue expenditure for acquiring technical know-how continues to be deductible under Section 37(1).Conclusion:The High Court dismissed the tax appeal, answering the question in favor of the assessee and against the revenue. It held that the technical consultancy fees were revenue expenditure and not subject to the provisions of Section 35AB of the Income Tax Act, 1961.