[CIT v. Swaraj Engines Ltd., (2009) 309 ITR 443
(SC)]
The High Court dismissed 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) on the following question of law :
“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 payments of
the 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 S. 35AB of the Income-tax Act, 1961, whereas the payment is a
capital 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.).”
On an appeal the Supreme Court noted that, 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 by it. The claim for deduction in respect of the said
payment was made by the respondent. During the relevant A.Y. 1995-96, royalty
was paid by the assessee as a percentage of net selling price of the licensed
goods products.
According to the Supreme Court, two questions arose for its
determination. Firstly, whether the question regarding applicability of S.
35AB of the Income-tax Act, 1961, was ever raised by the Assessing Officer in
this case ? The second question which arose for determination in this case was
whether the expenditure incurred was revenue expenditure or whether it was an
expenditure which was capital in nature and depending on the answer to the
said question, the applicability of S. 35AB of the Income-tax Act needed to be
considered.
The Supreme Court observed that, on the first question,
there was considerable amount of confusion. It appeared that prior to the A.Y.
1995-96, the Department had been contending that the royalty expenditure came
within the ambit of S. 35AB. However, there was some doubt as to whether the
said contention regarding applicability of S. 35AB was at all raised. In this
regard, the order of the Assessing Officer was not clear principally because
it had focussed only on one point, viz., whether such expenditure is
revenue or capital in nature. The Supreme Court held that even for the
applicability of S. 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 S. 35AB may not apply. However if it is found to be capital in nature,
then the question of amortisation and spread over, as contemplated by S. 35AB,
would certainly come into play. Therefore in the view of the Supreme Court, it
was not correct to say that in this case, interpretation of S. 35AB was not in
issue and the above reasoning was further fortified by the question framed by
the High Court.
The Supreme Court therefore held that the said question
needed to be decided authoritatively by the High Court as it was an important
question of law, particularly, after insertion of S. 35AB and therefore,
remitted the matter to the High Court for fresh consideration in accordance
with law.
The Supreme Court did not express any opinion on the second
question observing that it was for the High Court to decide, after construing
the agreement between the parties, whether the expenditure was revenue or
capital in nature and, depending on the answer to that question, the High
Court would have to decide the applicability of S. 35AB of the Income-tax Act.
The Supreme Court kept all contentions on both sides expressly open.
