Section 35AB, of Income Tax Act, 1961 states that
(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 company is entitled to a deduction under this section, then, the 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).
section 35AB of Income Tax Act, 1961
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Section 35AB of the Indian Income Tax Act grants taxpayers a deduction for expenses incurred in obtaining specialized knowledge related to their business or profession. Such know-how is defined as technical expertise or experience that is not publicly available and can be acquired through research and development or by collaborating with industry experts. While investing in this kind of knowledge can be expensive, it can provide significant long-term benefits such as increased efficiency and profitability.
Expenses eligible for deduction under section 35AB include payments for the purchase, acquisition, or use of patents, inventions, designs, trade secrets, and other similar property rights. Furthermore, expenses related to the use of industrial, commercial, or scientific equipment, technical information, or assistance can also be included. It is crucial to note that the expenses must be incurred wholly and exclusively for acquiring know-how relevant to the taxpayer’s business or profession, and must be recognized as an asset in their accounting records.
To claim a deduction under section 35AB, the taxpayer must furnish a report from a chartered accountant verifying that the expenses were incurred for the purpose of obtaining know-how related to their business or profession. Moreover, the know-how acquired must be used for the purpose of the business or profession. The deduction is equal to the expenses incurred, but it is limited to 25% of the taxpayer’s total income for the previous year. Any unutilized deduction amount can be carried forward and claimed in subsequent years.
In conclusion, section 35AB provides a valuable incentive for businesses to invest in cutting-edge technologies, processes, and expertise by allowing a deduction for expenses incurred in acquiring specialized knowledge. However, it is critical to ensure that the expenses are wholly and exclusively incurred for obtaining relevant know-how and that the acquired knowledge is used for the business or profession’s purpose. Failure to comply with these requirements may result in the disallowance of the deduction and additional tax liabilities.