Tribunal directs AO on interest deduction, limits tech know-how fees to 6 years

The Tribunal allowed the appeal in part, directing the Assessing Officer to verify and decide the deduction claim for interest on borrowed capital under section 36(1)(iii) based on the Tribunal's directions. The disallowance of the technical know-how fees claimed under section 35AB was upheld, with the Tribunal stating that the deduction period for such fees is limited to six consecutive years, and failure to claim it in one year does not extend this period.

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Issues Involved:
1. Disallowance of interest on borrowed capital claimed under section 36(1)(iii).
2. Disallowance of technical know-how fees claimed under section 35AB.

Detailed Analysis:

1. Disallowance of Interest on Borrowed Capital Claimed Under Section 36(1)(iii):

The assessee claimed a deduction of Rs. 84,64,767 for interest on borrowed capital under section 36(1)(iii). The Assessing Officer disallowed the claim, treating it as capital expenditure, a view upheld by the CIT(A). The assessee argued that the interest was for the expansion of an existing business, not for setting up a new business, and cited the decision in CIT v. Alembic Glass Industries Ltd. and Alembic Chemical Works Co. Ltd. v. CIT. The revenue authorities distinguished these cases, stating the interest was for acquiring new plant and machinery, thus capitalizing it was appropriate, referencing CIT v. Associated Cement Co. Ltd.

The assessee's counsel contended that the amendment to section 36(1)(iii) by the Finance Act, 2003, effective from 1-4-2004, should not apply retrospectively. The counsel cited the Rajasthan High Court's decision in CIT v. Hindustan Zinc Ltd. supporting prospective application, while the revenue relied on the Calcutta High Court's decision in JCT Ltd. v. Dy. CIT for retrospective application.

The Tribunal, considering the principle of law laid down by the Supreme Court in CIT v. Vegetable Products Ltd., adopted the view favorable to the assessee, holding that the amendment to section 36(1)(iii) is prospective. The Tribunal referred to several decisions, including India Cements Ltd. v. CIT, Challapalli Sugars Ltd. v. CIT, and CIT v. Associated Fibre & Rubber Industries (P.) Ltd., supporting the deduction of interest on borrowed money for business purposes, including the expansion of existing business.

The Tribunal concluded that the assessee is entitled to the deduction under section 36(1)(iii) for interest on borrowed money used for business expansion. However, if the interest was paid to the supplier of machinery for deferred payment, it must be capitalized. The Tribunal remanded the matter to the Assessing Officer for verification and decision in accordance with these directions.

2. Disallowance of Technical Know-How Fees Claimed Under Section 35AB:

The assessee claimed a deduction of Rs. 33,333 under section 35AB for technical know-how fees. The deduction was initially allowed in the assessment year 1992-93 and was to be spread over six years. The assessee argued for an extension of the deduction period since it was not claimed in the assessment year 1993-94. The Tribunal upheld the disallowance, stating that the deduction under section 35AB is limited to six consecutive years, and the failure to claim it in one year does not extend this period.

Conclusion:

The appeal was partly allowed. The Tribunal directed the Assessing Officer to verify and decide the claim for interest on borrowed capital under section 36(1)(iii) based on the Tribunal's directions. The disallowance of the technical know-how fees under section 35AB was upheld.

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