High Court Of Madras
CIT vs. Drilcos (India) (P) Ltd.
Sections 35AB, 37(1)
Asst. Year 1993-94
R. Jayasimha Babu & S.R. Singharavelu, JJ.
Tax Case No. 413 of 2000
2nd December, 2003
Counsel Appeared
T. Ravikumar, for the Appellant : J. Balachandran, for the Respondent
JUDGMENT
R. Jayasimha Babu, J. :
The assessee made a claim for deduction of a sum of Rs. 17,49,889, which it had paid to its foreign collaborator in terms of the agreement which had been entered into between the parties on 7th June, 1990. The payment was made during the previous year relevant to the asst. yr. 1993-94. That payment was for the purpose of obtaining transfer of technical know-how which comprised of technical information, as also drawings and licence. The sum so paid was the first of three instalments that were to be paid under the terms of that agreement. Though the foreign collaborator sent some technical information, that collaborator subsequently did not supply the drawings and thereafter reneged on the agreement. The assessee thereafter filed a suit against that collaborator, which was subsequently settled in a later assessment year, under which it received certain sums, which was about 60 per cent of the amount that had been paid by the assessee.
The assessee’s claim that the amount paid is deductible as an item of expenditure under s. 37 of the IT Act, as in its view, it was a revenue expenditure, was accepted by the Tribunal, though such a plea has been rejected by the assessing authority and the appellate authority.
It is submitted for the Revenue that after the introduction of s. 35AB in the Act, when the object for which the expenditure incurred is know-how, the same is governed only by that section, and deductions are allowable only in accordance therewith and it is not permissible to fall back on s. 37.
Learned counsel for the assessee submitted that in this case, though at the time of payment, it was intended by the parties that the assessee would receive know-how, subsequent events showed that know-how in fact was not made available to the assessee in the manner required, and consequently, no use could be made, and was not made, of the little information that was given.
This Court had occasion to consider s. 35AB in the case of CIT vs. Tamil Nadu Chemical Products Ltd. (2003) 180 CTR (Mad) 557 : (2003) 259 ITR 582 (Mad). It was held therein that “irrespective of whether it is a capital or revenue expenditure”, the expenditure incurred for the purpose of acquiring know-how was required to be treated only in accordance with s. 35AB and the deduction that was allowable was one-sixth of the amount paid as lump sum consideration for acquiring the know-how.
It was also observed in that case that : “The time with reference to which the assessee’s entitlement is to be judged is the previous year in which the payment was made and not the subsequent year in which the assessee’s project was either abandoned or the know-how became useless by reason of the non-availability of other inputs required to make the project success.”
The assessee in this case was clearly not entitled to have the amount paid by it to its collaborator for acquiring know-how as an item of revenue expenditure allowable as a deduction under s. 37. That payment was required to be considered only under s. 35AB and the deduction that was allowable was one-sixth of the amount as provided in that section.
The appeal is allowed.
[Citation : 266 ITR 12]
