DY. COMMISSIONER OF INCOME TAX (ASSTT.). vs. SAYAJI INDUSTRIES LTD.

TAXAP/91/2003HC GujaratGJHC24025855200323 April 2008Author: HONOURABLE MR. JUSTICE K.A.PUJ,HONOURABLE MR. JUSTICE RAJESH H.SHUKLA10 pages
AI SummaryDismissed

What were the facts?

The assessee, Sayaji Industries Ltd., is a manufacturer that acquired technical know-how from a foreign company for its manufacturing activities. For assessment year 1987-88, the assessee claimed the entire payment made for this technical know-how as a revenue expenditure. The Assessing Officer proposed to treat this expenditure under Section 35AB of the Income Tax Act, 1961, allowing only 1/6th of the payment as deduction for the year. The assessee contended that the agreement granted only a limited right to use the know-how, which remained the property of the foreign company, and that it was used for existing products, making the expenditure revenue in nature and not covered by Section 35AB. The CIT(Appeals) upheld the Assessing Officer's view, deeming the expenditure capital in nature and falling under Section 35AB. The Income Tax Appellate Tribunal (ITAT) reversed this decision, relying on its prior ruling for the same assessee for assessment year 1989-90.

What did the High Court hold?

The High Court held that Section 35AB of the Income Tax Act, 1961, applies only to capital expenditure and not to revenue expenditure. The Court noted that the Supreme Court in CIT v. Swaraj Engines Ltd. observed that if expenditure is revenue in nature, Section 35AB may not apply. The purpose of Section 35AB, introduced to encourage indigenous scientific research, was to provide a deduction for capital expenditure on know-how, which was previously not allowable. It was not intended to curtail existing benefits for revenue expenditure. The Court cited Palkhivala's commentary, stating that Section 35AB is an enabling section for capital expenditure and should be confined to such consideration. Revenue expenditure for acquiring or using know-how is allowable under Section 37(1) and does not attract Section 35AB. Therefore, the expenditure in question, being revenue in nature, was not subject to the limitations of Section 35AB. The High Court, having previously upheld the Tribunal's view on this identical issue for the same assessee and expenditure in another assessment year, dismissed the revenue's appeals.

What were the issues?

1. Whether the use of technical know-how for the purpose of business under a license for a temporary period, for a lump sum consideration, amounts to acquiring know-how within the meaning of Section 35AB of the Income Tax Act, 1961, and whether the Appellate Tribunal was right in deleting the disallowance made under Section 35AB? Assessee's Contention: The assessee argued that under the agreement, it acquired only a limited right to use the know-how, which remained the property of the foreign company. The know-how was used for existing products, not new ones, making the expenditure revenue in nature and thus not covered by Section 35AB. Revenue's Contention: The revenue contended that Section 35AB does not require exclusive ownership of know-how or its use for new items. The Assessing Officer believed the expenditure was for acquiring technical know-how for business purposes and thus subject to the 1/6th deduction under Section 35AB. The CIT(Appeals) found the expenditure to be capital in nature and covered by Section 35AB.

Which sections of the Income-tax Act were involved?

Section 35AB,Section 37(1)

AI-generated summary — verify with the full judgment below

TAXAP/74/2003 1/10 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No.74 of 2003 With TAX APPEAL No.75 of 2003 With TAX APPEAL No.91 of 2003 For Approval and Signature: HONOURABLE MR. JUSTICE AKIL KURESHI HONOURABLE MS. JUSTICE HARSHA DEVANI ========================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment? 2 To be referred to the Reporter or not? 3 Whether their Lordships wish to see the fair copy of the judgment? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder? 5 Whether it is to be circulated to the civil judge? ========================================= DY.COMMISSIONER OF INCOME TAX (ASSTT.) - Appellant(s) Versus SAYAJI INDUSTRIES LTD. - Opponent(s) ========================================= Appearance: MRS MAUNA M BHATT for Appellant(s): 1, MR MANISH J SHAH with MR JP SHAH for Opponent(s): 1, ========================================= CORAM : HONOURABLE MR. JUSTICE AKIL KURESHI and HONOURABLE MS. JUSTICE HARSHA DEVANI Date : 10/07/2012

TAXAP/74/2003 2/10 JUDGMENT COMMON ORAL JU

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