High Court of Madhya Pradesh
Commissioner
of Income-tax
v.
Frontline
Software & Services (P) Ltd.
DIPAK
MISRA AND R.K. GUPTA, JJ.
MAIT
NO. 133 OF 2006
March 26, 2007
Section 35AB of the Income-tax Act,1961 – Technical know-how expenditure – Assessee had started a computer training centre in collaboration with NIIT – Assessee by filing return for relevant accounting year, in Profit and loss account had debited a certain sum under head of ‘Technical know-how’ which was paid to NIIT under agreement – Assessing Officer held that sum so paid, being a fee, was in nature of capital expenditure under section 35AB and therefore allowed deduction only one-sixth of said amount, penalty proceedings under section 271(1)(c) were initiated – On appeal, Commissioner (Appeals) allowed said debit – Tribunal held that investment of said amount could not be treated to be a capital expenditure and said activities did not come within purview of Explanation to section 35AB – Whether Tribunal was justified – Held, yes
FACTS
The assessee had started a computer training centre in collaboration with NIIT. The assessee by filing the return, in the Profit and loss account had debited a sum of Rs. 6,20,000 under the head of ‘Technical know-how’, the said amount was paid to NIIT in pursuance of the agreement. The Assessing Officer allowed deduction of one-sixth of the said amount holding that the sum so paid, being a fee, was in the nature of capital expenditure under section 35AB and adding the said amount to the total income, penalty proceedings under section 271(1)(c) were initiated for furnishing inaccurate particulars of income. On appeal, the Commissioner (Appeals) allowed the said debit. Further, the Tribunal held that the investment of the said amount could not be treated to be a capital expenditure and activities of the assessee did not come within the purview of the Explanation to section 35AB.
On revenue’s appeal :
Keeping in view the Explanation to section 85AB if the activities of the instant assessee were taken into account then the assessing authority had not held in his assessment order that the information which was received was likely to assist in the manufacturing or processing of goods or in the working of a mine, oil well or other sources of mineral deposits, etc. The Assessing Officer in his order of assessment had taken into account the activities which were carried out by the assessee. The said activities had also been keeping in view the activities run by the assessee the Commissioner (Appeals) concluded that NIIT provided basic software and also trained their teachers who ultimately were responsible for coaching the students enrolled in their colleges and section 35AB was not applicable. That aspect of the matter was also considered by the Tribunal and on such consideration of the activities the Tribunal had arrived at the conclusion that the activities of the assessee were not covered by the Explanation to section 35AB. [Para 9]
The definition of the terms ‘technical know how’ is very specific. According to the said definition, it means industrial information or technique which is likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits and so on would be covered by the words ‘technical know-how’. In the instant case, keeping in view the findings of fact arrived at the assessee was not carrying out any activity of manufacture or processing of goods. The assessee was also not carrying out any mining activity or other activities which were mentioned in the said Explanation. The assessee was only carrying out the activity of imparting training in computer operation. The information as such was being used for the purposes of coaching the students enrolled in their colleges. There was no scope of ambiguity in the Explanation which defines the words ‘technical know how’. [Para 10]
It was required to see whether the definition ‘technical know-how’ was applicable in the manner as argued by the revenue then the legislative intent which is reflected in the Explanation attached to section 35AE shall become meaningless. It is so, because the Legislature has intended for the purpose of covering the said amount towards the income and the revenue expenditure. The intention of the Legislature would be clear if the Explanation as such is read. The utilization of the technical know-how would only be relevant with reference to the context if the said technical know-how is relevant to assist the assessee with regard to manufacturing or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto). Having regard to the nature of the Explanation to section 35AB the chargeable income or allowing a debit or not or to make the payment to be treated as a capital expenditure has to be understood with reference to the context of the legislative intent. It is not the legislative intent that the use of the words ‘technical know-how’ for the purposes other than not covered by the Explanation would also be treated as the capital expenditure on which tax is leviable. The ‘technical know-how’ by itself would not be enough until such technical know-how is likely to assist for the manufacturing or processing of goods. In the instant case, the assessee admittedly had not been found to have indulged into the activities of manufacturing or processing of goods which could be said that such technical know-how was likely to assist the assessee with regard to activities including any mine and other activities referred to in the said Explanation. The assessee was utilizing the said technical know-how for imparting training in the computer operation for coaching the students which was neither manufacture nor processing of goods. The activity as such also not an activity of a mine, oil well or other sources of mineral deposits including the searching for discovery or testing of deposits or the winning of access thereto. [Para 17]
In view of the above discussion, there was no substantial law was involved in the instant appeal and, accordingly, the same was to be dismissed. [Para 18]