TaxTMI 
TaxTMI 
2012 (7) TMI 988
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....f the decision of the Tribunal deleting the disallowance confirmed by CIT (Appeals) of Rs. 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. The Tribunal reversed such decision of the CIT (Appeals), upon which, the revenue has raised this question before us. 3. The counsel for the revenue pointed out that such question is squarely covered in favour of the revenue by virtue of the decision of the Apex Court in case of Britannia Industries Ltd. v. Commissioner of Income Tax and another, reported in (2005) 278 ITR 546(SC), wherein the Apex Court held that section 37(4) of the Act provides for only specific items of expenditure allowable towards guest house expenses. Counsel for the respondent assessee was unable to dispute this pos....
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....tay 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 not covered under section 37(3) of the Act and rule 6D of the Rules. He relied upon the decision of the Calcutta High Court in case of Commissioner of Income Tax v. Vidyutt Metallics Ltd.,(supra). In the said decision, the High Court opined that section 37(3) of the Act read with rule 6D of the Rules would limit only those expenditure incurred for stay in the hotels and confined it to daily allowances and would extend to any other expenditure, provided it is wholly and exclusively laid out for the purposes of business. 7. Having thus heard the learned counsel for the parties and having perused the deci....
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....t year 1989-90, paid a sum of Rs. 20,35,335/- and described it as technical know-how fees. The assessee further expended a sum of Rs. 2,88,545/- and described as technical service fees. Thus, total sum of Rs. 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 provisions of section 35AB of the Act are applicable only in respect of capital expenditure and not in respect of revenue expenditure. The assessee further contended that the company while acquiring such know-how, obtained no ownership right on such information and know-how was furnished by the foreign company to the assessee under an agreement. The assessee also contended that such technical know-how was for the purpose of production of its existing items which are being manufactured by the assessee company since many years. 11. The Assessing Officer, however, did not accept the contentions of the assessee. He though ag....
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....ned 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 Act." 15. It is this view of the Tribunal which is under challenge at the hands of the revenue. Learned counsel Shri Varun Patel for the revenue vehemently contended that the Tribunal committed grave error in allowing the assessee's appeal. He submitted that section 35AB of the Act is widely worded and includes any expenditure incurred for acquisition of technical know-how. Concept of ownership here is not material. He further submitted that once an expenditure, whether revenue or capital, is covered under section 35AB of the Act, by virtue of very language of sub-section (1) of section 37 of the Act, the assessee cannot claim....
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....t 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 decision of the Apex Court in the case of Commissioner of Income Tax v. Swaraj Engines Ltd., (2009) 309 ITR 443in which the Apex Court had an occasion to examine the decision of Punjab & Haryana High Court on the question of applicability of section 35AB of the Act. To this decision, we would revert at a latter stage. 18. From the submissions made before us, central question that calls for our consideration whether in fact the revenue is justified in applying section 35AB of the Act, or whether the assessee, as held by the Tribunal, was correct in contending that the said provision would have no application. Before going to such question, we may rec....
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....vious 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 business. Such deduction, however, was to be spread over a span of six years, during each of the six years starting with the year when such expenditure was incurred, the assessee being eligible for deduction of the one-sixth of the total expenditure. 20. The moot question is whether such provisions contained in section 35AB of the Act would cover also revenue expenditure. In this context, we may peruse the decision of the Apex Court in case of Commissioner of Income Tax v. Swaraj Engines Ltd. (supra) more closely. The said decision was rendered in an appeal filed by the revenue challenging the decision of the Punjab & Haryana High Court in the case of Commission....
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....ay 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 the background leading to the appeal before the Apex Court due to such reason. The Apex Court decision would suggest that for determining whether certain expenditure would fall within section 35AB or not, it would be important to examine the nature of the expenditure. If it is found that the same is revenue in nature, the question of applicability of section 35AB of the Act would not arise. On the other hand, if it is found to be capital in nature, then the question of amortization and spreading over, as contemplated under section 35AB of the Act would come into play. It was in this background that the Apex Court desired that this question, that is, the question of th....
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....n 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. In such a case, during the period when section 35AB remained in operation, the assessee could claim benefit thereof. However, 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 of the Act and such deduction cannot be curtailed or limited by applying section 35AB. In that view of the matter, taking such an expenditure out of section 37(1) of the Act, would not arise. 25. We are unable to concur with the view of the Madras High Court in case of Commissioner of Income Tax v. Tamil Nadu Chemical Products Ltd. (supra),....