IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED :19.01.2010 CORAM : THE HONOURABLE MR.JUSTICE D.MURUGESAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA TAX CASE (APPEAL) NO.629 OF 2004 The Commissioner of Income Tax, Coimbatore. ... Appellant v. M/s Elgi Ultra Industries Limited, (Formerly Elgi Polytex Limited), Elgi House, Trichy Road, Coimbatore-641 045. ... Respondent Appeal filed under section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal, 'C' Bench, Chennai dated 30.01.2004 made in ITA No.532/Mds/1997 against the order of The Commissioner of Income tax (Appeals), Coimbatore in ITA No.389/96-97 dated. 08.01.97 against the order of The Deputy Commissioner of Income Tax, Special Range-I, Coimbatore in PAN/GIR No.CV-2237/SR-1/CBE dated. 18.3.96. For appellant : Mr.T.Ravikumar For respondent : Mr.V.S.Jayakumar JUDGMENT P.P.S.JANARTHANA RAJA,J. The above Tax Case Appeal is filed by the revenue under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Chennai 'C' Bench, dated 30.01.2004 made in ITA No.532/Mds/1997. 2. When the above appeal was posted for admission on 20.08.2004, this Court admitted the same on the following substantial questions of law: "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the expenses incurred to get technical know-how is fully allowable under Section 37 of the Income Tax Act, 1961?" https://hcservices.ecourts.gov.in/hcservices/ 3. Assessee is a company engaged in the manufacture of textile machinery accessories like transmission belts, cots and aprons, loom components etc. The relevant assessment year is 1995-1996 and the corresponding accounting year ended on 31.03.2005. The assessee filed its return of income on 29.11.1995 declaring income of Rs.21,39,740/-. The Assessing Officer sent intimation under Section 143(1)(a) of the Income tax Act, 1961, on 11.03.1996. Subsequently, notice under Section 143(2) of the Act was issued and assessment was completed under Section 143(3) of the Act determining total income of Rs.28,41,340/-. While computing the assessment, the assessing officer disallowed the claim of Rs.7,41,675/- towards technical know- how and he has allowed 1/6 of the amount under Section 35AB of the Act i.e. Rs.1,23,613/-. The balance amount of Rs.6,18,062/- was disallowed by the assessing officer. Aggrieved by that order, the assessee has filed an appeal before the Commissioner of Income Tax (Appeals), Coimbatore. The said Commissioner confirmed the assessment and dismissed the appeal. Aggrieved by that order, the assessee has filed an appeal before the Income Tax Appellate Tribunal, Chennai. The Tribunal has held that the amount paid towards technical know-how is a revenue expenditure and allowed the entire amount claimed by the assessee and allowed the appeal. As against that order, the Revenue has filed the present appeal. 4. The learned counsel appearing for the revenue submitted that the Tribunal is wrong in allowing the technical know-how expenditure as revenue expenditure under Section 37 of the Income Tax Act, 1961. He further submitted that the Tribunal ought to have appreciated Section 35AB of the Act, which is squarely applicable to the facts of the present case since know-how fees is paid as per the agreement dated 25.09.1994. So, the assessing Officer was justified in restricting 1/6th of the total amount paid by the assessee and disallowed the balance portion and in support of his contention he relied on the decision of this Court in the case of COMMISSIONER OF INCOME TAX VS, TAMIL NADU CHEMICAL PRODUCTS LTD., reported in 259 ITR 2003 and COMMISSIONER OF INCOME-TAX VS. DRILCOS (INDIA) PVT. LTD. reported in (266 ITR 2004). Therefore, the order passed by the Tribunal is not in accordance with law and the same has to be set aside. 5. The learned counsel appearing for the assessee submitted that once the expenditure incurred is revenue expenditure, it has to be allowed under Section 37 of the Act and the Tribunal is correct in allowing the said deduction and has also relied on the decision of the Apex Court in the case of COMMISSIONER OF INCOME TAX VS. SWARAJ ENGINES LTD., reported in (2009) 309 ITR 443 in support of his contention and the same has to be confirmed. 6. Heard the learned counsel appearing on either side and perused the materials available on record. It is seen from the order of the Tribunal that it has allowed the appeal by relying on the https://hcservices.ecourts.gov.in/hcservices/ following judgments: (1) CIT Vs. Simpson & Co., Ltd., (239 ITR 83) (2) Jonas Woodhead and Sons (India) Ltd., Vs. CIT (224 ITR 342), (3) Alembic Chemical Works Co., Ltd., Vs. CIT (177 ITR 377) (4) I.A.E.C. (Pumps Ltd.,) (232 ITR 316), In the aforesaid decisions only applicability of Section 37 of the Act has been considered and nowhere the scope of Section 35 AB of the Act has been dealt with. The Apex Court in the case of COMMISSIONER OF INCOME TAX VS. SWARAJ ENGINES LTD., (2009) 309 ITR 443 while considering the scope of Section 35AB, held as follows: "5. On the first question, it has been vehemently urged by Shri Iyer, learned senior counsel on behalf of the respondent-assessee, that the High Court was right in dismissing the Department's appeal in limine following its earlier judgment in the case of CIT v. JCT Electronics Ltd. [2008] 301 ITR 290 (P&H) in I.T.A. No.383/2004. On the first question, there is considerable amount of confusion. It appears that prior to the assessment year 1995-96, the Department has been contending that the royalty expenditure comes within the ambit of section 35AB. However, there is some doubt as to whether the said contention regarding applicability of section 35AB was at all raised. In this regard, the order of the Assessing Officer is not clear principally because it has focused only on one point, viz., whether such expenditure is revenue or capital in nature. At the same time, it is important to note that even for the applicability of section 35AB, the nature of expenditure is required to be decided at the threshold because if the expenditure is found to be revenue in nature, then section 35AB may 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. Therefore, in our view, it would not be correct to say that in this case, interpretation of section 35AB was not in issue. Our above reasoning is further fortified by the question framed by the High Court in the impugned judgment which reads as under: "Whether, on the facts and in the circumstances of the case, the Hon'ble Income-tax Appellate Tribunal is right in upholding the decision of the Commissioner of Income-tax (Appeals) that the payment of royalty made by the assessee-company to M/s. Kirloskar Oil Engine Ltd., to acquire technology know-how under the agreement dated October 19, 1989, is a revenue expenditure and does not come within the ambit of the provisions of section 35AB of the Income-tax Act, 1961, whereas the payment is a capital https://hcservices.ecourts.gov.in/hcservices/ expenditure in view of the following judgments. (A) Fenner Woodroffe and Co. Ltd. v. CIT [1976] 102 ITR 665 (Mad); (B) Ram Kumar Pharmaceuticals Works v. CIT [1979] 119 ITR 33 (All); (C) CIT v. Warner Hindusthan Ltd. [1986] 160 ITR 217 (AP) ; and (D) CIT v. Southern Switchgear Ltd. [1984] 148 ITR 272 (Mad)" 6. On a bare reading of the said question, it is clear that applicability of section 35AB in the context of royalty paid to Kirloskar as a percentage of the net sale price being revenue or capital in nature and depending on the answer to that question, the applicability of section 35AB also arose for determination before the High Court. Be that as it may, the said question needs to be decided authoritatively by the High Court as it is an important question of law, particularly, after insertion of section 35AB. Therefore, we are required to remit the matter to the High Court for fresh consideration in accordance with law. 7. On the second question, we do not wish to express any opinion. It is for the High Court to decide, after construing the agreement between the parties, whether the expenditure is revenue or capital in nature and, depending on the answer to that question, the High Court will have to decide the applicability of section 35AB of the Income-tax Act. On this aspect we keep all contentions on both sides expressly open." From a reading of the aforesaid decision, it is clear that the Supreme Court directed the High Court first to decide the matter whether the expenditure incurred is revenue or capital expenditure. After construing the agreement entered into between the parties and depending on the result, the High Court has to decide the applicability of Section 35AB of the Act. In the present case, absolutely there is no details regarding technical know-how payment and also there is no discussion by any of the authorities below that how the technical know-how is the revenue expenditure. There is complete lack of details in respect of agreement entered into between the assessee and the foreign corroborator and the revenue has not enclosed the copy of the said agreement. In view of the absence of details and discussion in the order, it is difficult for this Court to determine whether the expenditure incurred towards technical know- how is the revenue or capital expenditure. The authorities below have not given any details regarding the technical know-how payment. In these circumstances, the order passed by the Tribunal is set aside and the matter is remitted back to the Income Tax Appellate Tribunal, "C" Bench, Chennai, to decide the matter afresh in accordance with https://hcservices.ecourts.gov.in/hcservices/ law as expeditiously as possible, after giving opportunity to the assessee. 7. The above Tax Case Appeal is allowed and the matter is remitted to the Income Tax Appellate Tribunal, "C" Bench, Chennai, to decide the matter afresh in accordance with law and in light of the above judgments, after taking into consideration the observations made in this decision. No costs. Sd/- Asst.Registrar /True Copy/ Sub.Asst.Registrar raa To 1) The Income Tax Appellate Tribunal, Chennai Branch, III Floor, Rajaji Bhavan, Besant Nagar, Chennai - 90 2) The Commissioner of Income Tax (Appeals) Spl. Range I, Coimbatore. 3) The Commissioner of Income Tax Coimbatore. 4) The Deputy Commssions of Income Tax (Appeals) Special Range I, Coimbatore + 1 CC to Mr.J.Naresh Kumar,Standing Counsel for IT.SR.3050 + 1 CC to Mr.V.S.Jayakumar,Advocate,SR.2899 T.C.(A) No.629 of 2004 TEJ (CO) ss (29.01.2010) https://hcservices.ecourts.gov.in/hcservices/