By TIOL News Service

AHEMDABAD, JUNE 19, 2017: THE ISSUE BEFORE THE COURT IS - Whether expenditure incurred by way of lumpsum consideraton for acquiring technical knowhow for the purpose of extension of the existing business, is allowable deduction u/s 35AB. YES is the verdict.

Facts of the case:

The assessee is engaged in the business of manufacturing soaps. During the relevant period, the assessee company had expended certain amounts for acquiring technical knowhow for the purpose of setting up a new manufacturing unit of soda ash. 1/6th of such expenditure was claimed by way of deduction during this assessment year 1999-2000 in terms of section 35AB of the Income Tax Act. The AO disallowed the claim on the ground that the assessee had not yet started the soda ash project. In the opinion of the AO the business had not commenced and the assessee was, therefore, not entitled to the deduction. On appeal, the ITAT held that the fact that the business had not started was of no consequence. In the opinion of the Tribunal the essential requirements for applicability of Section 35AB were that the assessee should have paid amount by way of lumpsum for acquiring technical knowhow, that such technical knowhow should be capable of being used for the purpose of business of the assessee. If these requirements were satisfied the assessee could claim the deductions spread over six years from the year of initial expenditure.

On appeal, the HC held that,

++ the counsel pointed out that the setting up of soda ash factory by the assessee is considered to be extension of existing business of manufacturing soap. Contrary contention of the Revenue came to be rejected by this Court in case of Commissioner of Income Tax vs. Nirma Ltd. - 2014-TIOL-193-HC-AHM-IT. In any view of the matter, therefore, deduction u/s 35AB cannot be denied to the assessee. This Court had confirmed the decision of the Tribunal that the setting up of the manufacturing facility of soda ash was by way of an extension of the existing business of the assessee of manufacturing soap. That being the situation, deduction u/s 35AB cannot be denied. In plain terms, sub section (1) of section 35AB grants exemption to the extent of 1/6th of the expenditure incurred by the assessee by way of lumpsum payment towards consideration for acquiring technical knowhow for the use for the purpose of the business. These conditions are satisfied. The question is, therefore, answered in the negative.

(See 2017-TIOL-1128-HC-AHM-IT)