1. The decision rendered in this appeal shall also govern disposal of other two connected appeals being IT Appeal Nos. 41 and 44 of 1999 as all these three appeals arise between the same parties, i.e., same assessee (respondent herein) and secondly, the appeals involve more or less common substantial questions of law except the difference being they arise in different assessment years.

2. This is an appeal filed by the Revenue, (CIT) under Section 260A of the IT Act against an order dt. 20th Nov., 1998 (wrongly mentioned in memo of appeal as 20th Oct., 1998 at p. 1 of paper book of IT Appeal No. 17 of 1999) passed by Tribunal in IT Appeal No. 974/Ind/1994. This appeal was admitted for final hearing on following substantial question of law by this Court on 8th May, 2000 :

"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that provisions of Section 35AB in respect of technical know-how expenses are not attracted as the same are of revenue nature, even though the provisions of Section 35AB are applicable to technical know-how expenses irrespective of the fact whether the same are of revenue nature or of capital nature ?"

3. Facts insofar as they relate to answer the aforesaid question need mention in brief.

4. The dispute in this appeal relates to asst. yr. 1988-89. The respondent, i.e., assessee is a limited company engaged in the business of manufacture and sale of moulded goods in plastics. The assessee commenced its business of manufacturing in 1988-89. The assessee has its one sister-concern by name M/s Bright Brothers Ltd. (another limited company). This sister-company is also engaged in the same kind of manufacturing activity in which assessee is engaged namely manufacture of moulded goods of plastics. The sister-concern sells their goods in the market under the brand name "bright".

5. On 12th Aug., 1986, assessee entered into an agreement with its sister-concern--Bright Brothers Ltd. In terms of this agreement, the assessee was licensed to use the brand name "Bright" on the goods manufactured and sold by them in market. The agreement further provided supply of technical know-how by the sister-concern (Bright Brothers Ltd.) to assessee for being used by them (assessee) in planning, designing engineering start up and operations of their plant. The agreement further provided for training the personnel of assessee by the sister-concern. The agreement then provided for payment of what is called royalty by assessee to its sister-concern for providing the requisite technical know-how for starting the manufacture of goods and use of brand name "bright". The assessee was to pay a sum equivalent to the amount of 2-5 per cent of the total gross sale value of the goods or 5 per cent of the added value which ever is lower in lump sum so long as the agreement was in force. The amount was to be paid by the assessee to its sister-concern once in a year within 30 days of the end of financial year. The agreement also provided that the use of the brand name as also know-how would be personal to assessee and is not transferable to any other person by the assessee unless permitted by the sister-concern in writing. These, in substance, were the clauses contained in an agreement (12th Aug., 1986) on which parties agreed to do business.

6. It is the case of assessee that in terms of this agreement, a sum of Rs. 1,03,742 was paid by the assessee to its sister-concern by way of what is called royalty in the relevant assessment year in question. The assessee, therefore, claimed deduction of this amount as a revenue expenditure incurred for running the business in the relevant assessment year.

7. The question, therefore, arose before the AO (Assessing Officer) as to what is the true character of the payment made by the assessee to its sister-concern ? viz.,--whether it is in the nature of capital expenditure, or whether it can be regarded as revenue expenditure, or whether it can be treated as expenditure incurred for acquiring know-how so as to be taxed in the hands of assessee under Section 35AB ibid. As observed supra, the contention of assessee was that payment of Rs. 1,03,742, being in the nature of revenue expenditure, the same is an allowable deduction. The AO by order, dt. 18th March, 1991 (p. 49) held the payment to be in the nature of capital expenditure. The AO then further held that notwithstanding the finding, recorded by him treating the expenditure to be in the nature of capital expenditure, the amount can be brought for deduction under Sections 35A and 35AB because it is paid for acquiring patent rights, copyrights and technical know-how. Accordingly, and in view of the alternative finding, the AO directed the deduction to be made as provided in Sections 35A and 35AB.

8. The assessee (respondent) felt aggrieved of the aforementioned finding filed appeal to CIT(A). The CIT(A) by order dt. 22nd Aug., 1994 (p. 59 of paper book) allowed the appeal in part. While reversing the aforementioned finding of AO, the CIT(A) held the payment to be in the nature of revenue expenditure. In other words, disagreeing with both the views taken by AO, the CIT(A) held that the payment made by assessee to its sister-concern was revenue expenditure and hence, it is an allowable deduction. The CIT(A) further held that in the facts of this case provisions of sections 35a and 35ab are not attracted because it is not the case of acquisition of know-how by the assessee. In this view of the matter, the finding of AO in regard to applicability of Sections 35A and 35AB was set aside.

9. The Revenue, therefore, felt aggrieved of this order, filed appeal to Tribunal. By impugned order (p. 83 of paper book), the Tribunal dismissed the appeal and upheld the view taken by CIT(A). In other words, the Tribunal while concurring with the view taken by the CIT(A), held that the payment of royalty made by assessee is in the nature of revenue expenditure and hence, it is an allowable deduction. The finding in regard to non-applicability of Section 35A and Section 35AB was also upheld by the Tribunal. It is against this order, rather against this finding, the Revenue has filed this appeal under Section 260A of the IT Act. As taken note of supra, the appeal was admitted for final hearing only on aforementioned substantial question of law.

10. Heard Shri R.L. Jain, learned counsel for the appellant and Shri G.M. Chafekar, learned senior counsel with Shri D.S. Kale, learned counsel for respondent.

11. Having heard learned counsel for the parties and having perused record of the case, we are inclined to allow the appeal and answer the question framed supra in favour of revenue and against the assessee.

12. We may take note of the fact that Revenue has not made any attempt to challenge the finding recorded by the Tribunal in favour of assessee so far as this appeal is concerned to the effect that payment in question is in the nature of revenue expenditure. In other words, no substantial question of law is framed at the instance of Revenue (appellant herein) on the issue as to whether payment made by assessee can be regarded as capital expenditure or revenue expenditure so far as this appeal is concerned. In view of this position emerging from the record of the case, we have to proceed on the basis by accepting the finding of the Tribunal that the true character of payment in the given case was in the nature of revenue expenditure and not capital.

13. The question that really arises for consideration in this appeal is, whether provisions of Section 35AB are attracted in the facts of the case notwithstanding the finding recorded by the Tribunal that payment in question made by assessee to its sister-concern is in the nature of revenue expenditure, or in other words notwithstanding the fact that the payment in question made by assessee to its sister-concern is regarded as revenue expenditure, whether provisions of Section 35AB are attracted for claiming deduction, or not ?

14. Sec. 35AB falls in Chapter IV of the Act which deals with computation of total income of an assessee. Sec. 35AB deals with the cases relating to expenditure on know-how. It reads as under:

"35AB. Expenditure on know-how-- (1) Subject to the provisions of Sub-section (2), where the assessee has paid in any previous year (relevant to the assessment year commencing on or before the 1st 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 amount so 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 equal instalments for each of the five immediately succeeding previous years.

(2) Where the know-how referred to in Sub-section (1) is developed in a laboratory, university or institution referred to in sub-section (2b) of section 32a, one-third of the said lump sum consideration paid in the previous year by the assessee shall be deducted in computing the profits and gains of the business for that year, and the balance amount shall be deducted in equal instalments for each of the two immediately succeeding previous years.

(3) Where there is a transfer of an undertaking under a scheme of amalgamation or demerger and the amalgamating or the demerged amalgamated company or the resulting company, as the case may be, shall be entitled to claim deduction under this section in respect of such undertaking to the same extent and in respect of the residual period as it would have been allowable to the amalgamating company or the demerged company, as the case may be, had such amalgamation or demerger not taken place.

Explanation.--For the purposes of this section, "know-how" means any industrial information or technique 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 (including the searching for, discovery or testing of deposits or the winning of access thereto)."

15. In order to attract the provisions of Section 35AB, what is necessary is that assessee must have paid in any previous year prior to 1st April, 1998 any lump sum consideration for acquiring any know-how for use for the purposes of his business. Once this condition is found to have been proved, then, provision of Section 35AB(1) gets attracted thereby entitling an assessee to deduct 1/6th of the amount in computing the profit and gains of business for that previous year and remaining to be deducted in equal instalments for each of the five immediately succeeding previous years. This is subject to the condition that the payment is made against acquiring of know-how as defined in Explanation appended to section. In other words, it must be proved that payment is made by an assessee for acquiring that know-how which satisfies the requirement contained in Explanation appended to Section 35AB ibid.

16. It is not in dispute that assessee obtained the know-how for manufacture of goods from its sister-concern and utilised it effectively in manufacturing the goods and its sale in market. It is also not in dispute that a lump sum consideration of Rs. 1,03,742 was also paid by assessee prior to 1st April, 1998 to its sister-concern for obtaining the use of know-how. In such circumstances, in our view, the requirement of Section 35AB are satisfied.

17. The question that may arise for consideration and the same was decided in favour of assessee by the CIT(A) and Tribunal was whether it is a case of acquiring of a know-how ? In the opinion of Tribunal, it is not and hence, Section 35AB is not attracted.

18. In our opinion, the use of expression "acquiring" in Section 35AB has to be given liberal meaning rather than the strict one. In other words, in order to attract the rigour of Section 35AB, it may not be necessary for assessee to actually become absolute owner of the know-how. But if on payment of money consideration, an assessee is able to use the know-how to run his business then in such event, the requirement of Section 35AB stands satisfied. Merely because actual title is not passed in favour of assessee yet if an assessee is able to use effectively his business with the aid of know-how obtained by him pursuant to an agreement on payment of consideration then, in our opinion, it is sufficient to attract the provisions of Section 35AB. In our opinion, use of expression "acquire" has to be used liberally and in the context of actual user of know-how--be that in a capacity as conditional/limited owner or absolute owner or as licensee.

19. Indeed, mere reading of Sub-sections (2) and (3) of 35A which deals with acquisition of patent and copyright, would support the aforesaid interpretation when it uses the expression "where the fights come to an end without being subsequently revived". If the intention of the legislature was to apply the provisions of section 35a or 35ab, which have common object, only in those cases where assessee acquires an absolute title in patent rights/copyrights/know-how then, sub-sections (2) and (3) of section 35a would not have used the aforementioned expression. Indeed, the aforementioned expression suggest that even a right acquired for limited period when comes to an end and not revived after particular period fixed by the parties, the assessee cannot claim any deduction after it comes to an end. This necessarily follows that provisions of section 35a/35ab can be attracted even in those cases where right is not acquired absolutely but it is acquired for limited period.

20. In our opinion, thus, the AO was justified in applying the provision of Section 35AB while working out the profit and gains in the manner provided therein. In our opinion, to attract the applicability of Section 35AB, the nature of payment namely, whether capital or revenue is not decisive. What is material is, whether payment made satisfies the requirement of Section 35AB, or not ?

21. Since, in this case, all the requirement of Section 35AB are satisfied, we are of the view that the AO was partly justified in working out the profit and gains in the light of method provided in Section 35AB. We are not however called upon to examine as to whether the case falls in Section 35A because no substantial question of law is framed for examining the applicability of Section 35A ibid.

22. Accordingly and in view of aforesaid discussion, the appeal succeeds and is allowed; impugned order of Tribunal insofar as it deals with the question referred supra is set aside. The question framed is answered in favour of Revenue (appellant) and against an assessee (respondent). It is answered that in the facts of this case, the provisions of Section 35AB will apply.

23. This takes us to other two appeals being IT Appeal No. 41 of 1999 and IT Appeal No. 44 of 1999. These appeals arise out of asst. yrs. 1989-90 and 1990-91 respectively. In these two appeals, following substantial question of law are framed at the time of final hearing :

IT Appeal No. 41 of 1999 :

"1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that whatever expenditure made on account of royalty payment was allowable as revenue expenditure ?

2. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing expenditure of Rs. 8,03,147 in asst. yr. 1989-90 and Rs. 7,38,840 in asst. yr. 1990-91 treated by the AO as for non-business purpose, without giving any findings that such expenditure was incurred for business purpose?"

IT Appeal No. 44 of 1999 :

"1. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that whatever expenditure made on account of royalty payment was allowable as revenue expenditure ?

2. Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing expenditure of Rs. 6,03,147 in asst. yr. 1989-90 and Rs. 7,38,840 in asst. yr. 1990-91 treated by the AO as for non-business purposes, without giving any findings that such expenditure was incurred for business purpose?"

24. In our opinion, the substantial question of law framed in IT Appeal No. 17 of 1999 referred supra also arises out of the impugned order of the Tribunal which is subject-matter of these two appeals and hence, we propose to formulate the said question also for the purpose of disposal of these two appeals by taking recourse to proviso to Section 260A(4) ibid. Indeed, in our opinion, all these three appeals arise out of more or less common order and based on same agreement. It is for this reason, all the three substantial questions of law need to be framed in all the three appeals identically for proper disposal. In this view of the matter, following additional substantial questions of law being question No. 3 is also framed in IT Appeal Nos. 41 and 44 of 1999 :

"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that provisions of Section 35AB in respect of technical know-how expenses are not attracted as the same are of revenue nature, even though the provisions of Section 35AB are applicable to technical know-how expenses irrespective of the fact whether the same are of revenue nature or of capital nature?"

25. In these, two appeals, challenge is laid to the nature of transaction by the Revenue whereas in earlier appeal, i.e., IT Appeal No. 17 of 1999, no such question of law was framed for that assessment year. Be that as it may, in our opinion, in view of finding recorded by us in IT Appeal No. 17 of 1999, it may not be very necessary or material to examine and answer the question No. 1, wherein this Court has held that notwithstanding the fact that though payment made by assessee was in the nature of revenue expenditure, yet provisions of Section 35AB ibid will apply.

26. In any event, in our opinion, keeping in view the law laid down by Supreme Court in the case of CIT v. Ciba of India Ltd. (1968) 69 ITR 692 (SC), Empire Jute Co. Ltd. v. Commissioner Of Income Tax ., (1980) 124 ITR 1 (SC), CIT v. Avery India Ltd. (1994) 207 ITR 813 (Cal), CIT v. M.B. Umbrella Industries,(1984) 145 ITR 292 (MP) and the nature of agreement dt. 12th Aug., 1986, the payment made by the assessee to its sister-concern in the relevant assessment year are in the nature of revenue expenditure.

27. In the light of aforesaid detailed discussion, question No. 1 framed in IT Appeal Nos. 41 and 44 of 1999 is answered against the Revenue and in favour of assessee. Question No. 2 thus need not be answered being academic in nature. Question No. 3 is answered in favour of Revenue and against the assessee.

28. As a result of aforesaid discussion and in the light of finding recorded by us on the questions framed, the appeal filed by the Revenue is partly allowed. Impugned order passed by the Tribunal is partly set aside.