Commr.of Income Tax-Ii,Chandigarh
Vs. M/S Swaraj Engines Ltd.  INSC 810 (6 May 2008)
CIVIL APPELLATE JURISDICTION CIVIL
APPEAL NO. 3347 OF 2008 (Arising out of S.L.P.(C) No.16277/2007) Commr. of
Income Tax-II, Chandigarh ...Appellant(s) Versus M/s. Swaraj Engines Ltd.
...Respondent(s) ORDER Leave granted.
This Civil Appeal is filed by the
Revenue against the order passed by the Punjab & Haryana High Court in
I.T.A.No.131/2004. The impugned decision is dated 18th May, 2006.
M/s. Swaraj Engines Ltd.
(respondent herein) entered into an agreement of transfer of technology
know-how and trade mark with Kirloskar Oil Engines Ltd.
under which royalty was payable
it. The claim for deduction in respect of the said payment was made by the
respondent. It is important to note that during the relevant Assessment Year
1995-96, royalty was paid by the assessee as a percentage of net selling price
of the licensed goods products.
Two questions arise for
determination in this Civil Appeal. Firstly, whether the question regarding
applicability of Section 35AB of Income Tax Act, 1961 was ever raised by the AO
in this case? The second question which arises for determination in this case
is whether the expenditure incurred is revenue expenditure or whether it is an
1 expenditure which is capital in nature and depending on the answer to the
said question, the applicability of Section 35AB of the Income Tax Act needs to
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
C.I.T. vs. M/s. J.C.T. Electronics Ltd. in I.T.A. No.383/2004. On the first
question, there is considerable amount of confusion. It appears that prior to
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 AO 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
"Whether on the facts and in
the circumstances of the case, the Hon'ble ITAT is right in upholding the
decision of the Commissioner of Income-Tax (Appeals) that the payment of
royalty made by the assessee 2 company to M/s. Kirloskar Oil Engine Ltd. to
acquire technology know- how under the agreement dated 19.10.89, is a revenue
expenditure and does not come within the ambit of provisions of Section 35AB of
the Income Tax Act, 1961, whereas the payment is a capital expenditure in view
of the following judgments.
A. Femmur Woodruf & Co.Ltd. V.
CIT 102 ITR 665 (Mad) B. Ram Kumar Pharmaceuticals Works V CIT 119 ITR 33
C. CIT V. Warmar Hindustan Ltd.
160 ITR 217 (AP) D. CIT V. Southern Switch Gears ltd. 148 ITR 272 (Mad)"
On 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
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.
Accordingly, the impugned judgment
of the High Court is set aside and the matter is remitted for fresh
consideration in accordance with law.
3 The Appeal is allowed
accordingly with no order as to costs.
(B. SUDERSHAN REDDY) New Delhi,
May 06. 2008.