2001 (11) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Allowance of royalty payment of Rs.12,16,694 as revenue expenditure.
2. Allowance of know-how fees and royalty payable to Jyoti Ltd. as revenue expenses.
3. Deduction of Rs.50,000 as technical report fees.

Summary:

Issue 1: Allowance of Royalty Payment of Rs.12,16,694 as Revenue Expenditure
The court examined whether the royalty payment of Rs.12,16,694 paid to Jyoti Ltd. under an agreement dated September 1, 1972, was capital or revenue expenditure. The Revenue argued that the payment was capital in nature as it provided an enduring benefit. However, the court noted that the agreement granted a non-exclusive license to manufacture electric motors, with Jyoti Ltd. retaining the right to grant similar licenses to others. The royalty was based on sales, and the technical documentation had to be returned upon termination of the agreement. The court concluded that the payment was for the use of an asset and not for acquiring an asset, thus qualifying as revenue expenditure. The Tribunal's decision to allow the deduction was upheld.

Issue 2: Allowance of Know-How Fees and Royalty Payable to Jyoti Ltd. as Revenue Expenses
The court noted that both parties agreed this issue was settled in favor of the assessee by a previous decision dated November 3, 1999, in Income-tax Application No. 269 of 1999. Therefore, the amount of Rs.3 lakhs as know-how fees and Rs.1,03,068 as royalty payable to Jyoti Ltd. were allowed as revenue expenses.

Issue 3: Deduction of Rs.50,000 as Technical Report Fees
The Assessing Officer initially disallowed the deduction of Rs.50,000 for technical report fees, considering it capital expenditure. However, the Commissioner (Appeals) and the Tribunal found that the payment was for expanding the existing business and had been capitalized in the relevant and subsequent years. The Tribunal confirmed that the expenditure was incurred for business expansion, thus qualifying as revenue expenditure. The court found no infirmity in the Tribunal's order and upheld the deduction.

Conclusion:
All three questions were answered in the affirmative, in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.