Ita/1010/2008 Of M/S Diffusion Engineers Ltd v. The Deputy Commissioner Of Income Tax

R IN THE HIGH COURT OF KARNATAKA ATBENGALURU| DATEKD THIS THE 1 DAY OF APRIL 2O15 PRESENT| THE HON’BLE MR.JUSTICE VINEET SARAN| AND THE HON’BLE MRS.JUSTICE S SUJATHAITA NO.1010 OF 2ZOO BHRHIWHR M/s.DIFFUSION ENGINEERS LTDRFORMBRLY KNOWN ASDIFFUSION BNGINEBEERS PVT LIREP. BY ITS DIRECTOR PRASHANT GARGNO.35/4, 2 & 3, BANNERGHATTA ROAD,BENGALURU — 560 O3O. ..APPELLANT (BY SRI A.SHANKAR AND SRI M.LAVA, ADVOCATES) AND: THR DEPUTY COMMISSIONER,OF INCOME TAXSPECIAL RANGE-1,.C.R. BUILDING,QUEENS ROAD,BRHNGALURU — 560 OO1. _ RBHSPONDENT| (BY SRI JEEVAN J.NEERALGI, ADVOCATE) KEERK THIS ITA IS FILED UNDER SECTION 260-A OF.IL.T.ACT, 1961 ARISING OUT OF ORDER DATED30.6.2008 PASSED IN ITA.NO.1022/BANG/19995FOR THER ASSBSSMEBENT YBAR 1992-1993 AND I017/BANG/1997 FOR THE ASSESSEMENT YEAR| 1993-1994, PRAYING TO: 1) FORMULATE THE)SUBSTANTIALQUESTIONS.OF!LAWSTATEDTHEREIN, 11. SET ASIDE THE ORDER PASSED BY.THE.ITATBANGALOREINITA.NO.1022/BANG/1995, ITA017/BANG/1997—DATED 30.06.2008, ANNEXURE-A. THISITA|HAVINGBBBNHBHARIANT)RBSBRVBD FOR JUDGMENT ON 31 MARCH 20105,COMINGON|FOR,PRONOUNCHMENTOF!JUDGMENT THIS DAY,SUJATHA J.,DHLIVKERE])THE FOLLOWING: JUDGMENT This appeal is filed by the assessee challengingthe order passed by the Income Tax Appellate|Tribunal (hereinafter referred to as the “Tribunal”)|Bangalore “B” Bench, dated 30.6.2008 pertaining to the assessement years 1992-93 and 1993-94. ”.2. The facts in brief are: - that the appellant is a company torm of)organization, which is engaged in the production ofengineering related products. The appellant company|on 9.10.1991 entered into an agreement with an|English company based in United Kingdom (U.K.)|under name and style “Wall Colmony Limited” (WCL) for the procurement of a technology called “Colmonoy|Sweat-on-Paste”. In consideration of the transfer oftechnical know how, the appellant company agreed topay WCL a sum of 90,000 pounds in three equal|instalments. For the assessment years 1992-93 and|1993-94, the assessee claimed 100% deduction on.amount expended towards procuring technical know-how as revenue expenditure talling under Section 37|of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’ for brevity). The Assessing Officer (AO)rejected the said claim of the assessee and brought|the said expenditure under Section 39AB of the Act.Being aggrieved, the assessee carried the matter in|appeal before the CIT (Appeals) which was allowed,|against which the revenue preferred appeals before|the Tribunal. The Tribunal rejected the appeals filed|by the department. Being dissatisfied, the departmentfiled appeals before this Court in ITA No.214 &|215/2002 for both the assessment years. This Court|after hearing the parties allowed the appeals filed by|the revenue and remanded the matter back to the| Tribunal to consider the grounds urged by both the|parties and to pass an order in accordance with law. The Tribunal, in the light of the directionsissued by this Court considered the matters afresh|and aiter hearing the parties, allowed the appeals|filed by the revenue. This common order passed for|both the assessment years 1992-93 and 1993-94 is |assailed by the assessee in this appeal. 3. We have heard Sri A Shankar, learnedcounsel appearing for the appellant-company as well|as Sri Jeevan J. Neeralgi, learned counsel appearing|for the revenue at length and perused the material onrecord. The appeal is admitted on the following|substantial questions of law: “a. Whether the Tribunal was justified in|law in holding that the amount expended|forproducing technicalknow-howbeallowed as expenditure under Section S5AB|instead of Section 37 of the Income Tax on|the facts and circumstances of the case? b) Whether the Tribunal erred in not|holding that deduction contemplated under| section 35 AB is only in respect of a capital|nature and the deduction of a revenue|nature is allowable under Section 37(1) of|the Income Tax Act?” 3. We have heard Sri A Shankar, learnedcounsel appearing for the appellant-company as well|as Sri Jeevan J. Neeralgi, learned counsel appearing|for the revenue at length and perused the material onrecord. The appeal is admitted on the following|substantial questions of law: “a. Whether the Tribunal was justified in|law in holding that the amount expended|forproducing technicalknow-howbeallowed as expenditure under Section S5AB|instead of Section 37 of the Income Tax on|the facts and circumstances of the case? b) Whether the Tribunal erred in not|holding that deduction contemplated under| section 35 AB is only in respect of a capital|nature and the deduction of a revenue|nature is allowable under Section 37(1) of|the Income Tax Act?” 4he relevant clauses of the agreement enteredinto between the appellant-company and the WCL areextracted and reproduced below: 2.echnical Knowhow: D1Subject to receipt by WCL of paymentby DEPL of the sum specified in to Clause 3.2. 1and below WCL shall supply to DEPL suchwritten details and descriptions of the Technicalknow-how for imparting to DEPL an adequateknowledge of the Technical Know-how practicedby WCL at the date of this Agreement forproduction of the Product 2.2 To assist DEPL to manufacture and producethe Product'inIndiq WCL|shall provideinstruction to DEPL as follows:- OO]WCL shall give access to WCL’s facilities:in the UK for the purpose of practicaltraining in and to study Technical know-how to not more than two of DEPL’s|in the UK for the purpose of practicaltraining in and to study Technical know-how to not more than two of DEPL’s| production personnel for not more than anaggregate offive days| 3Payment by DEPL: 3.5Without prejudice to any breach by|DEPL of any of its obligations hereunder thisAgreement shall be null and void ifpayment byDEPL under Clquse 3.1] and 3.2 to WCL 1s notreceived. However, it ts a condition precedent tothe grant of permission by the Reserve Bank ofIndia.thatthetotalpayments|madein|accordance with the aforementioned clausesShould not exceed 8% of the value of salesmade by DEPL pursuant to this Agreementwithin the period of 10 years from the datehereof, or within the period of 7 years from thedate of the commencement of commercialproduction of the Product, whichever firstexpires. 4.Confidentiality3 4.2 DEPL acknowledges that Technical Know-how and the copyright in all written printedphotographed or duplicated matter supplied byWCL under or in connection with this Agreement|shall belong to WCL and all such written printedphotographed or duplicated matter shall be handed back to WCL on determination of thisAgreement 4.3 DEPL during the life of this Agreement andthereafter shall take all steps necessary topreserve the secrecy of Technical Know-how:communicated to it or its representatives andShall not disclose the same to any third party(except those of its officers or employees whoseduties.cannotbe.fulfilledwithoutsuchdisclosure) for as long as the same are notfreely available to the public| 6.|Chromium Monoborides 6.5. DEPL will enable representatives of orpersons authorized by WCL at all reasonabletimes to visit the places where it manufacturesand produces the Product and there to inspectthe testing system used and the records of testsmade in respect of Indian C.M.’s and to inspectany additional documents relevant to theinspection compliancewith.theSaidspecifications, and to select and take away andkeep free of charge a reasonable number ofsamples for testing. 6.7. WCL will in using its rignts of control andinspection strive to cause to DEPL no more inconvenience than is reasonably necessary toassure itself that the foregoing provisions of this|Clause 6 are complied with by DEPL and as tothe preservation of WCL’s reputation in relationto the product. 7.|Trade Marks: 6.5. DEPL will enable representatives of orpersons authorized by WCL at all reasonabletimes to visit the places where it manufacturesand produces the Product and there to inspectthe testing system used and the records of testsmade in respect of Indian C.M.’s and to inspectany additional documents relevant to theinspection compliancewith.theSaidspecifications, and to select and take away andkeep free of charge a reasonable number ofsamples for testing. 6.7. WCL will in using its rignts of control andinspection strive to cause to DEPL no more inconvenience than is reasonably necessary toassure itself that the foregoing provisions of this|Clause 6 are complied with by DEPL and as tothe preservation of WCL’s reputation in relationto the product. 7.|Trade Marks: DEPL acknowledges and agrees that all trademarks and trade names and in particular(without limitation) “Colmonoy” and “ColmonoySiwweat-on-Paste” are and will remain thexclusivepropertyof|WCLand/or)Associated Company of WCL and may be usedby DEPL only while this Agreement is in forceon Products to be exported with the priorapproval in writing of WCL (such approval not tobe unreasonably withheld) for the purposes ofthis Agreement. DEPL shall be entitled to useits own trademark or trade name for use on theProduct sold within India. 9.Manufacture 94 DEPL shall be entitled to sub-licence the|manujacture and sale of the Product and theuse of the Technical Know-how under thisAgreementTo.any other person firmOLcorporation in India should this be necessary to|enable DEPL to comply with its requirements, and obligations under this Agreement. The|terms of such sub-licence shall however besubject to the agreement of WCL as well as the|other parties concerned and shall be subject to|the approval of the Government of India. 11.Termination: 11.2. Either party shall have the right to givenotice of termination (to operate SO days afterbeing given) if the other party has committed aserious breach of its obligations under this|Agreement and (if such breach is capable of|remedy) has failed to remedy the same within|14 days of a written notice calling on it to do soand specifying the nature of the breach. 12.Exclusions: 12.1. No rights or licences (whether express.or implied) are granted by WCL under or by|virtue of this Agreement except those which are.specifically set out therein, and no such rights|or licenses shall continue to have effect after|the termination of this Agreement except so faras spectfic provision its made therein for suchcontinuing effect. 5.earned counsel appearing for the appellant,|placing reliance on these clauses of the agreement,| argued that at no point of time absolute transier ofrights over the know how was made by WCL|Company to the assessee i.e., there was no absolute|acquisition of the technical know how by the)assessee, as it was only a transfer of right to use thetechnical know-how. The effective control of the'|know how always remained with the WCL and thus,the expenditure incurred towards procurement of know how was a revenue expenditure and not a|capital expenditure, as no enduring benefit accrued|to the assessee in the course of his bDuUSINeSsS. ‘Thelearned counsel drew our attention to the CBDT|Circular dated 12.60.1985 wherein it 1S provided asunder: “15.2 As a consequence of this amendent ,the deductions qllowable under Section:35A of the Income-tax Act in respect of anyexpenditure of a capital nature incurred ontheacquisition.ofpatentrightsOrcopyrights and under section SSAB inrespect of expenditure on know-how have|been withdrawn with effect from theassessment year 1999-2000.” 6. Learned counsel further contended that the'provisions of Section 35AB are applicable only in thecases of capital expenditure and if it 1s revenue}expenditure, then the provisions of Section 37 shall|apply. In support of his contentions, reliance was|placed on: © (1) CIT vs SWARAJ ENGINES LIMITED — [309|ITR 443 (SC)/ (2) CIT vs SHRIRAM PISTONS AND RINGS|LTD — [307 ITR 363 (DEL)] “15.2 As a consequence of this amendent ,the deductions qllowable under Section:35A of the Income-tax Act in respect of anyexpenditure of a capital nature incurred ontheacquisition.ofpatentrightsOrcopyrights and under section SSAB inrespect of expenditure on know-how have|been withdrawn with effect from theassessment year 1999-2000.” 6. Learned counsel further contended that the'provisions of Section 35AB are applicable only in thecases of capital expenditure and if it 1s revenue}expenditure, then the provisions of Section 37 shall|apply. In support of his contentions, reliance was|placed on: © (1) CIT vs SWARAJ ENGINES LIMITED — [309|ITR 443 (SC)/ (2) CIT vs SHRIRAM PISTONS AND RINGS|LTD — [307 ITR 363 (DEL)] (3) CIT vs EMPIRE JUTE CO. LTD — [124 ITR|L51(SC)/ (4) CIT vs SAYAJI INDUSTRIES LTD. —- [81| DTR 418 (GUJ)] (5) CIT vs MOLEX (INDIA) LTD — [344 ITR 156)(KAR]] TT.The learned counsel appearing for the| revenue supported the order passed by the Tribunal| and relied on the Judgment of the Madras High Court in the case of Commissioner of Income Tax vs Drilcos(India) Pvt. Ltd. [(2004) 266 ITR 12] and the.Judgment of the Apex Court in Drilcos (India) Pvt. Ltd v. Commissioner of Income-Tax |(2012) 3438 ITR382(SC)]. - 8. Section 35AB(i) of the Act reads thus: “SSAB( Subject to the provisions of sub-Ssection(2), where the assessee has paid inany previous year (relevant to the assessmentyear commencing on or before the 1[Ss]day of’April, 1998) any lump sum consideration for|acquiring any know-how for use for the|purposes of his business, one-sixth of the|amountSo paid shall be deducted in|computing the profits and gains of the|business for that previous year, and the|balance amount shall be deducted in equalinstalments for each of the five immediately|Succeeding previous year.” QO As explained in the case ofMOLEX (INDIA) LTD., (supra) the following three factors have to be necessarily present to attract the said provision: (1) Payment by Lumpsum consideration | (2) For acquiring any Know-how tor use | (!)For the purposes of business then, one-sixth of the amount expended shall bededucted in computing the profits and gains of thebusiness for that previous years, and the balance amount shall be amortized for the next five|succeeding years in equal instalments. 1Q.This provision was inserted by Finance|Act 1985 with effect from 1.4.1986 and was in the|statute Book upto 31|[st]March 1999. 11.)section 37(i) of the Act reads thus: “37 (1) Any expenditure (not beingexpenditure of the nature described in|sections 30 to 36 [***/ and not being in the|nature of capital expenditure or personalexpenses of the assessee), laid out orexpended wholly and exclusively for thepurposes of the business or profession shallbe|allowed|incomputingtheincomechargeable under the head Profits and gains|of business or profession.” 12. Thus, what could be inferred from this is that.only the revenue expenditure falling under Sections|30 to 36 of the Act is attracted and not the capital|expenditure. 13. The Budget Speech of Finance Minister,1985-86 specifies the object for inserting Section| 35ABwitheffecttrom1.4.1986.therelevant paragraph of which is produced herewith: “With|aVIEW|TOprovidingJurtherencouragementforindigenousscientificresearch, I propose to provide that lump sumconsideration received by scientists for theknow-how developed by them would be spreadover a period of three years and charged to taxaccordingly. I also propose to provide thatindustrywriteoffthelumpSUMconsideration paid for acquiring know-how inSIx annual instalments. In cases where the'§know-how has been developed in Governmentlaboratories, Universities, laboratories ownedby|publicsector.companiesand.otherrecognized institutions, the write-off would bepermitted over a period of three years.” 14.TheMemoexplainingprovisions1n Finance Bill 1995 as regards deduction in respect ofexpenditure on Know how reads thus: paragraph of which is produced herewith: “With|aVIEW|TOprovidingJurtherencouragementforindigenousscientificresearch, I propose to provide that lump sumconsideration received by scientists for theknow-how developed by them would be spreadover a period of three years and charged to taxaccordingly. I also propose to provide thatindustrywriteoffthelumpSUMconsideration paid for acquiring know-how inSIx annual instalments. In cases where the'§know-how has been developed in Governmentlaboratories, Universities, laboratories ownedby|publicsector.companiesand.otherrecognized institutions, the write-off would bepermitted over a period of three years.” 14.TheMemoexplainingprovisions1n Finance Bill 1995 as regards deduction in respect ofexpenditure on Know how reads thus: 44. It is proposed to insert a new section 35ABin the Income-tax Act to provide that any lumpsum consideration paid by a taxpayer for'acquiring any know-how for use for the’purposes of his business will be allowed as' deduction by spreading it equally over sixyears, namely, the year in which the lump|sum consideration is paid and the five'immediately succeeding years. Where theknow-how is developed in a_ laboratory,university or institution referred to in sub-section (2B) of section 352A, the considerationShall be spread equally over three years. 45. For the purposes of this section, ‘know-how means any industrial information ortechnique likely to assist in the manufacture orprocessing of goods or in the working of aimine, ow well or other source of mineraldeposits (including the searching for, discoveryor testing of deposits or the winning of access|thereto). 15.CBDTCircular|dated:12.6.1985.as|regards depreciation to be allowed on intangible|assets reads thus : “15.2 As a consequence of this amendent ,the deductions allowable under SectionSSA of the Income-tax Act in respect of anyexpenditure of a capital nature incurred ontheacquisitionofpatentrightsOrcopyrights and under section 35AB in respect of expenditure on know-how have|been withdrawn with effect from theassessment year 1999-2000.” 16.|In the case oftCIT Vs.SwarayEngines (Supra), the Apex Court has held that “iu the.expenditure is found to be revenue in nature then|section 359A B may not apply. However, if it is foundto be capital in nature then the question of|amortization and spread over as contemplated, undersection 35A B would certainly come into play”. | 17.|In the case otShriram Pistons andRings Ltd. (supra), the Delhi High Court wasconsidering the question whether the amount paid by|the assessee to a collaborator Company is a revenue|expenditure or not, in the context of use of technical|know how. Itis held thus: “O2. Applying the various principles thathave been laid down, we find that there wasin fact no absolute transfer of any right in thedocumentationgiven|by|Riken.totheassessee. The assessee was entitled to use| the technical know-how for a period of five|years or for a lesser period, in case the|agreement was terminated before that. The|assessee did not have a free hand to sub-licence the technical knotw-how and that waspossibleonlywiththeprior,writtenpermission from Riken. For all other matters,theasSeCSSCCWaSliableTOtreatasconfidentialallinventions,drawings,documents, specifications etc. furnished by|Riken to the assessee. Even thought the|assessee was entitled to use the name of|Riken in the marketing of its products but that|rightwould cease uponthe expiry ortermination of the agreement. 33. As already noted, the agreement was|valid only for a period offive years but could|be terminated earlier. There is no magic in|the word “sold” used in clause 5.0 of the|agreement because on a reading of the|agreement as a whole, it appears to us that|what was transferred to the assessee was|only a right to use the technical know-how ofRiken and there was no sale of the technical|know-how which the assessee could exploit.The assessee’s rights were hedged in with allsorts of conditions, clearly making it a case of| 33. As already noted, the agreement was|valid only for a period offive years but could|be terminated earlier. There is no magic in|the word “sold” used in clause 5.0 of the|agreement because on a reading of the|agreement as a whole, it appears to us that|what was transferred to the assessee was|only a right to use the technical know-how ofRiken and there was no sale of the technical|know-how which the assessee could exploit.The assessee’s rights were hedged in with allsorts of conditions, clearly making it a case of| right to use the technology and not sale of thetechnical know-how.” 18. In the case ot Deputy Commissioner of| Income Tax Vs. Sayaji Industries Ltd.,(Guj), it 1s) held at para-23 as under: 693.To|OULrmind,therefore,theprovisions of S.S5AB of the Act can apply only|in case of capital expenditure and of course,provided the conditions set out therein are'fulfilled. In such a case, during the period|when s. S3SAB remained in operation, theasSeCSSCCcouldclaim|benefitthereof.However, such provision would not apply to a'revenue expenditure even if the same wasincurred for acquisition of technical know-how. —Deduction on such expenditure was available|even before the introduction of Ss. S35SAB of tAct and such deduction cannot be curtailed orlimited by applying s.35AB. In that view ofthe matter, taking such an expenditure out ofS.37(1) of the act, would not arise”. 19.In the case otDrilcos (India) Pvt. Ltda> Madras High Court relied on the judgment of CIT v. Tamil Nadu Chemical Products Ltd., case rendered|prior to the judgment of the Apex Court in Swaraj| Engines Ltd., (Supra) and has observed that Section|3S5AB of the Act are applicable in the context of thecase where no know-how was made available to the|assessee in the manner required. ACO.The said judgment of the Madras High)Court was carried in Appeal before the Apex Court|wherein, It was held that“it is true that on account ofcertain disputes which arose between the parties, thebalance amount was not paid by the assessee to theAmerican Company. However, the word “for” insection S3SAB of the Act, which is a preposition inEnglish grammar, has to be emphasized whileinterpreting section 35AB of the Act. Section 35AB ofthe Act says that the expenditure should have beenincurred for the purposes of the business of theassessee. In the present case, the technicalassistance agreement was entered into between theassessee and the American company for acquiringknow-how which was, in turn, to be used in thebusiness of the assessee. Once section 35AB of the Act comes into play, then section 37 of the Act has noapplication. | This was a case, where the main focus.of the court was with respect to certain dispute as|regards the full payment of consideration not being|paid by the assessee to the collaborator company. No|finding is given on the application of the law renderedin the case of Swaraj Engines Ltd. (Supra). D1.We have given our anxious consideration|to the relevant clauses of the agreement and the|judgments cited at the bar. Now, first we have to|decidewhether|theamountexpended|for.procurement of technical know-how is_ revenueexpenditure or capital expenditure. D?.The agreement clauses referred to above)make it clear that the assessee had only the right touse the know-how procured from WCL and there wasno absolute acquisition of the technical know-howby |the assessee. The technical know-how supplied by|the WCL to the assessee-Company is an adequate|Knowledge of the technical know-how, practiced by| the WCL at the date of the agreement for production|of the produce with certain conditions, which|establishes that the control was with the WCL. The|consideration paid is for imparting the knowledge of‘know-how’ to the assessee’s personnel. D?.The agreement clauses referred to above)make it clear that the assessee had only the right touse the know-how procured from WCL and there wasno absolute acquisition of the technical know-howby |the assessee. The technical know-how supplied by|the WCL to the assessee-Company is an adequate|Knowledge of the technical know-how, practiced by| the WCL at the date of the agreement for production|of the produce with certain conditions, which|establishes that the control was with the WCL. The|consideration paid is for imparting the knowledge of‘know-how’ to the assessee’s personnel. YAS.In clause-9 “A3=C73<;C@5”, it is stipulatedthat subject to performance by the assessee of his|obligations under the agreement, WCL shall grant|licence to the assessee to manufacture the product|during the life of the agreement. And during the life ofthe agreement, WCL shall not grant such licence in India to any other person, Company, whether body|corporate or not, partnership firm, Corporations etc.without obtaining prior consent from WCL. The)D;5@A1=3;1?=“ Clause at 11.2 stipulates that either|party shall have right to give notice of termination (tooperate 30 days after being given) if the other party|has committed a serious breach of its obligations|under this agreement and in the “exclusion” clause, itis specified that no rights or licences are granted by WCL under or by virtue of the agreement except those which are specilically set out therein, and no such|rights or licences shall continue to have effect after|the termination of the agreement except so far as|Specific provision 1s made for such continuing effect.A reading of these clauses makes it clear that the noabsolute acquisition of the technical know-how was|made by the assessee. In our view, the period of|agreement itself is not the determinative test to arriveat the nature of expenditure whether revenue or capital. Considering the over all clauses of the|agreement, we are of the opinion that amount|expended by the assessee for procurement oftechnical know-how is in the nature of revenue and|not capital. D4section 39AB of the Act is applicable if theexpenses incurred are held to be capital in nature.As we have noticed, the terms and conditions of the|agreemententeredinto.between|thepartiesdemonstrates that the amount expended are revenuein nature and does fall under Section 37 of the Act as held by the Apex Court in the case otf|SwarayEngine Ltd (Supra) 29. Another aspect of the matter is that to)attract the provisions of Section 35AB of the Act, the|three main factors i.e, 1) Payment of lumpsum|consideration, 2) acquiring any know how and 3) for|the purpose of business, have to be compulsorily|satisfied. As noticed above, there is no absolute|acquisition of the technical know how by the|assessee, no enduring benefit has accrued to the|assessee. No ownership or domain right was enjoyed|by the assessee. In such circumstances, we are oOt|the view that the amount expended by the assessee|towards procurement of ‘know-how’ is revenue in|nature and Section 35AB oft the Act 1s not attracted.The arguments advanced by the Revenue that|irrespective of the expenditure, whether revenue or capital, if it is technical know Section 35AB of the Actare attracted, cannot be accepted in view of the law|laid down by the Apex Court in the case of|SwarajEngines Ltd (Supra) —~26TheBudgetspeechot theFinanceMinister, memo explaining the provisions in Finance|Bill and the CBDT Circular dated 12.6.1985 fortifies|that Section 35AB is an enabling provision inserted|with effect from O1.04.1986 to provide further|encouragement for indigenous scientific research andnot to limit or curtail the Powers of Section 37 of theAct already existing. The reading of Section 3/7 of theAct makes it more clear that any expenditure not|being expenditure of the capital nature described in |sections 30 to 36 shall be allowed in computing theincome chargeable under the heads “profits and gainsin the business or profession”. It means that Section|3S5AB is applicable only if the expenditure is in thenaturfLot.capitalexpenditure.ThoughtheCommissioner of Income Tax (Appeals) has held that|the expenditure incurred by the assessee is revenue|in nature, falling under Section 37 of the Act, the|Tribunal tailed to appreciate the same in the right|perspective and has come to a conclusion that| section 35AB being a specific Provision tor technical|know, general Provision of Section 37 of the Act is notapplicable, which is not sustainable, in view of the|judgments discussed above and in terms of the|contract. We are thus to allow this appeal for two|reasons. Firstly, there is no ‘acquisition’ of technical|know-how as contemplated under Section 35AB of|the Act, and secondly, Section 35AB would not apply|to a revenue expenditure. 2/. As we have discussed earlier, judgment oftheApex Court in Drilcos (India) (Supra) is.distinguishable and not applicable to the tacts of thecase. On the other hand, the later judgment of the|Apex Court rendered in the case of Swaraj Engines|(Supra) is squarely applicable to the facts of the case. YA8.For the foregoing reasons, we allow this)appeal by setting aside the order of the Tribunal andanswering the substantial questions of law in favour|of the assessee and against the Revenue holding that|the expenditure incurred by the assessee towards the procurement of technical Know how by paying a|lumpsum consideration for use in the course of|business is a revenue expenditure falling u./s 37 of|the Act and the provisions of Section 35 AB of the|Act are not applicable to the present case. | Accordingly, the appeal stands allowed. Sd/-|JUDGESd/-.JUDGEBrn/JT