Section 35AB of the Income-tax Act, 1961: Expenditure on Know-How
Section 35AB provided a deduction spread over several years for qualifying lump-sum payments to acquire technical know-how. Its scope is historical: the provision applies to payments made in previous years relevant to assessment years commencing on or before 1 April 1998.
What is know-how?
The Explanation to section 35AB defines know-how as industrial information or techniques likely to assist in manufacturing or processing goods, or in working a mine, oil well or other mineral deposits. This includes searching for, discovering or testing deposits and obtaining access to them. The definition is narrower than every form of business advice or general information.
Section 35AB(1): Standard deduction over six years
Where an assessee paid a lump-sum consideration to acquire know-how for business use within the historical qualifying period, one-sixth of the amount was deductible in the payment year and the remaining five-sixths in equal instalments over the next five previous years, subject to subsection (2).
Section 35AB(2): Know-how from specified institutions
Where the know-how was developed in a laboratory, university or institution described in the former section 32A(2B), the deduction was accelerated: one-third in the payment year and the balance in two equal instalments over the immediately succeeding previous years. The specified-institution requirement is material and must be verified against the law applicable to the relevant year.
Section 35AB(3): Amalgamation or demerger
Where an undertaking was transferred under a scheme of amalgamation or demerger and the transferor was entitled to a section 35AB deduction, the amalgamated or resulting company could claim the balance for the remaining period to the same extent as the transferor would have been entitled, subject to the provision and relevant effective dates.
Illustration of historical deduction
Assume an eligible business paid Rs. 6,00,000 as qualifying lump-sum know-how consideration in a previous year within the permitted historical period.
| Provision | Annual deduction | Period |
|---|---|---|
| Section 35AB(1) | Rs. 1,00,000 | Payment year plus five succeeding previous years |
| Section 35AB(2), if eligible | Rs. 2,00,000 | Payment year plus two succeeding previous years |
This example illustrates the original statutory spreading mechanism; it does not imply that a new claim can be initiated for a current-year purchase.
Present-day treatment of acquired know-how
For acquisitions on or after 1 April 1998, section 32(1)(ii) of the Income-tax Act, 1961 provided depreciation for qualifying intangible assets, including know-how, owned and used for business or profession. Goodwill is excluded. The successor provision under the Income-tax Act, 2025 is section 33, which addresses depreciation of qualifying intangible assets, including know-how acquired on or after 1 April 1998. Applicable rates, written-down value rules and conditions should be checked for the relevant tax year.
The definitions in section 33(12) of the 2025 Act also cover know-how and the relevant intangible-asset categories. Not every technical service payment automatically becomes depreciable know-how: the nature of the rights acquired, ownership and use require examination.
Legislative history and applicability
- Finance Act, 1985: inserted section 35AB with effect from 1 April 1986.
- Finance Act, 1998: restricted the payment-year eligibility to assessment years commencing on or before 1 April 1998, through an amendment effective from 1 April 1999.
- Finance Act, 1999: inserted subsection (3) dealing with qualifying amalgamations and demergers with effect from 1 April 2000.
- From 1 April 2026: the Income-tax Act, 2025 governs the new tax-year framework, subject to savings and transitional provisions relevant to older matters.
Official statutory references
- Income Tax Department: Section 35AB - Expenditure on know-how
- Income Tax Department: Section 32 - Depreciation
- Income-tax Act, 2025 - Official PDF (see section 33)
- Income Tax Department: Depreciation rates and guidance
Frequently asked questions
Can Section 35AB be used for a new know-how purchase in 2026?
No. Its payment-year eligibility ended with the previous year relevant to assessment year 1998-99. Review section 33 of the Income-tax Act, 2025 for qualifying present-day intangible assets.
What is the difference between Section 35AB and depreciation?
Section 35AB spread certain historical lump-sum know-how payments over three or six years. Depreciation applies to qualifying assets under the relevant statutory block-of-assets and written-down-value rules.
Does every technical consultancy fee qualify as know-how?
No. The statutory definition, the character of the acquired rights and the applicable deduction or depreciation conditions must be met.
Editorial note: This article explains the historical provision and identifies current successor rules. For litigation or assessment of an earlier year, refer to the text and amendments applicable to that year.