Business expenditure: Deduction u/s.35AB of Income-tax Act, 1961: A.Ys. 1993-94 to 1995-96: Agreement for supply of technical knowhow: Assessee obliged to pay income-tax under the agreement: Assessee entitled to deduction of income tax paid u/s.35AB.

The assessee entered into a collaboration agreement with ESW for acquiring know-how for use in the business. Under the agreement, the assessee was required to pay a fixed sum and also the tax payable on such sum. Jharkhand High Court considered the following question of law: “Whether deduction u/s.35AB was permissible only in respect of the remittances made by the assessee to ESW or it was permissible in respect of the income-tax paid by the assessee on the said remittances in terms of the collaboration agreement? To be more specific the question is whether the phrase ‘lump sum consideration’ used in section 35AB(1) would include the taxes paid by the assessee under the agreement for acquisition of know-how?” The High Court held as under:

“(i) Deduction u/s.35AB is permissible in respect of any lump sum consideration for acquiring any know-how for use for the purpose of assessee’s business. The word ‘consideration’ include the entire obligation of the assessee, without which the assessee would not be able to acquire the know-how.

(ii) On the facts of the case the obligation of the assessee under the agreement with ESW extended not merely to remitting the amount of two million DM to ESW, but also extended to payment of taxes which would include the income-tax as well as the R&D cess. It seems quite obvious that if the assessee had not paid the tax or the R&D cess, and had merely made payment of two million DM to ESW, the latter would not be obliged to part with the knowhow in view of the terms of the collaboration agreement. Therefore, payment of these taxes are as integral a part of the ‘consideration’ as the payment of two million DM.

(iii) There is no logical reason for not treating the income-tax paid by the assessee in terms of the collaboration agreement as part of the ‘consideration’ for acquisition of the knowhow. The word ‘lump sum’ as used before the word ‘consideration’ in section 35AB only excludes periodical or turnover based payments like royalty, etc., and any one-time payment for the know-how would fall within the expression ‘lump sum’ if it is fixed and specified in the agreement, although it may be payable in installments.”