DY. C. I. T. (ASSTT.) vs. ANIL STARCH PRODUCTS LTD.

Facts

The Revenue (Dy. C.I.T.) filed three appeals against orders of the Income Tax Appellate Tribunal (ITAT). Tax Appeal No. 453 of 2000 pertains to Assessment Year (AY) 1990-91, Tax Appeal No. 158 of 2001 to AY 1993-94, and Tax Appeal No. 361 of 2001 to AY 1992-93. The assessee in each case had filed returns declaring specific incomes. The Assessing Officer (AO) determined higher total incomes for each assessee. Appeals to the Commissioner of Income-tax (Appeals) resulted in partial allowance in two cases and full allowance in one. The Revenue's appeals to the ITAT led to dismissal in two cases and partial allowance in one. These High Court appeals challenge the ITAT's decisions.

Held

The High Court held that Section 35AB of the Income-tax Act, 1961, applies only to capital expenditure incurred for acquiring technical know-how, provided the conditions within the section are met. It does not apply to revenue expenditure, even if incurred for acquiring technical know-how. Revenue expenditure for acquiring technical know-how was already allowable under Section 37(1) prior to the introduction of Section 35AB, and the latter section was not intended to curtail or limit these existing benefits. Section 35AB was introduced to provide further encouragement for indigenous scientific research by allowing amortized deduction for capital expenditure on know-how. The Court relied on the decision in Commissioner of Income Tax v. Swaraj Engines Ltd. and a CBDT circular. The Court noted that in the present cases, the Assessing Officer himself had proceeded on the basis that the expenditure was revenue in nature. Therefore, the questions of law were answered in favour of the assessees and against the Revenue. The appeals were allowed in part and dismissed accordingly.

Key Issues

The Tribunal had to decide the following questions of law: 1. Whether the Appellate Tribunal was justified in holding that expenditure under consideration was revenue in nature and allowable under Section 37 of the Income-tax Act, 1961, disregarding the special provisions of Section 35AB (Tax Appeal No. 158 of 2001). 2. Whether the Appellate Tribunal was right in holding that payment of technical know-how was not hit by the provisions of Section 35AB and thereby deleting the addition of Rs. 54,79,485/- (Tax Appeal No. 361 of 2001). 3. Whether the Appellate Tribunal was right in deleting the disallowance of Rs. 1,24,512/- made under Section 35AB of the Act (Tax Appeal No. 453 of 2000). Assessee's Contentions (implied from the judgment's reasoning): The expenditure on technical know-how was revenue in nature and thus allowable under Section 37(1). Section 35AB applies only to capital expenditure and not revenue expenditure. Section 35AB is an enabling section to encourage scientific research and not a disabling one that restricts existing benefits under Section 37(1). Revenue's Contentions (implied from the judgment's reasoning): The expenditure on technical know-how should be covered under Section 35AB, requiring amortization over six years, and not fully deductible as revenue expenditure under Section 37(1).