2002 (3) TMI 202 - AT - Income Tax

Tribunal rules on know-how payment treatment & capital expenditure, upholds subsidiary investment write-off

The Tribunal ruled that the lump sum know-how payment for acquiring technical knowledge should be treated under section 35AB, allowing a deduction of ... Labouration Agreement Issues Involved:1. Treatment of lump sum know-how payment under section 35AB vs. section 37(1).2. Write-off of investment in a subsidiary company as a capital expenditure vs. revenue loss.3. Alternative contention regarding the computation of deduction under section 35AB.Detailed Analysis:Issue 1: Treatment of Lump Sum Know-How PaymentGround No. 6: The CIT(A) erred in confirming the disallowance of lump sum know-how payment to foreign collaborators as revenue expenditure and restricting the allowance to 1/6th of the amount actually paid/remitted under section 35AB instead of the total amount payable under the agreement.The assessee company debited a lump sum payment of Rs. 14,50,249 for acquiring technical know-how from a German company to the profit and loss account. The agreement allowed the assessee exclusive rights and licenses for the manufacture of various textile machinery components. The CIT(A) held that under section 35AB, the assessee is entitled to a deduction of 1/6th of Rs. 14,50,249.Arguments:- Assessee: The expenditure constitutes revenue expenditure deductible under section 37(1) as it was for the utilization of technical information, not for acquiring ownership, thus should not be treated as capital expenditure.- Revenue: The technical know-how was acquired for an indefinite period without any provision for return, thus section 35AB applies, allowing only 1/6th deduction.Tribunal's Decision:- Applicability of Section 35AB: The Tribunal concluded that section 35AB applies to the lump sum payment for acquiring technical know-how. The section mandates that 1/6th of the amount paid shall be deducted in the year it is paid, with the balance spread over the next five years.- Nature of Expenditure: The Tribunal rejected the assessee's contention that the expenditure should fall under section 37(1), noting that section 35AB does not specify the expenditure must be capital in nature. The Tribunal emphasized that the statutory language of section 35AB is clear and unambiguous.- Capital vs. Revenue Expenditure: The Tribunal noted that the expenditure resulted in an enduring benefit and was therefore capital in nature, thus outside the purview of section 37(1).Alternative Contention:- The assessee argued that section 35AB should allow deduction of 1/6th of the total fees payable, not just the amount paid during the year.- Tribunal's Direction: The Tribunal directed the Assessing Officer to ascertain the factual position and allow 1/6th of the technical know-how fee for which liability has been incurred during the year, regardless of actual payment.Issue 2: Write-Off of Investment in Subsidiary CompanyGround No. 7: The CIT(A) erred in confirming the write-off of investment to the extent of 90% by Rs. 33,75,000 in its subsidiary company, treating the same as capital expenditure.The assessee wrote off Rs. 33,75,000, representing the write-down of investment in a sick subsidiary company as per a BIFR order. The Assessing Officer and CIT(A) treated this as a capital expenditure, not allowing it as a business loss.Arguments:- Assessee: The investment was made for business considerations to secure a full-fledged R&D center, thus the write-off should be treated as a revenue loss.- Revenue: The investment represents a capital investment, and any loss from writing down the face value of shares is a capital loss.Tribunal's Decision:- Nature of Investment: The Tribunal upheld the CIT(A)'s conclusion, noting that the investment was motivated by business considerations involving the expansion of business infrastructure, thus constituting a capital investment.- Distinguishing Case Law: The Tribunal distinguished the case from others where investments were directly connected with regular business operations.Alternative Contention:- The assessee requested the amount be treated as a long-term capital loss.- Tribunal's Direction: The Tribunal directed the Assessing Officer to treat the loss as a long-term capital loss.Issue 3: Alternative Contention Regarding Deduction under Section 35ABRevenue's Appeal: The revenue contended that since production of certain products had not commenced, the assessee should not be entitled to a deduction of 1/6th of the payment of technical know-how.Tribunal's Decision:- Commencement of Production: The Tribunal rejected the revenue's contention, stating that section 35AB provides for a deduction of 1/6th of the lump sum consideration for acquiring technical know-how, irrespective of the commencement of production.- Conclusion: The appeal of the revenue was dismissed.Conclusion:- Assessee's Appeal: Partly allowed.- Revenue's Appeal: Dismissed.