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Issues involved: Interpretation of technical collaboration agreement for payment of Rs. 2 lakhs as revenue expenditure.
Summary: The case involved an application u/s 256(2) of the Income-tax Act, 1961, where the Tribunal referred a question regarding the justification of allowing a payment of Rs. 2 lakhs as revenue expenditure under a technical collaboration agreement. The agreement between the assessee, a public limited company manufacturing ball bearings, and a German company provided for the supply of technical know-how for a lump sum consideration of Rs. 3 lakhs. The dispute arose regarding the nature of the payment for technical know-how, specifically the Rs. 2 lakhs, whether it constituted revenue or capital expenditure. The Income-tax Officer initially disallowed the claim of the assessee, stating that the payment for technical know-how, which provided enduring benefits, should be considered capital expenditure. However, the Commissioner of Income-tax (Appeals) endorsed the assessee's view that the expenditure was revenue in nature. The Tribunal, considering relevant case laws, allowed the claim of the assessee for deduction as revenue expenditure for the assessment year in question. In the subsequent proceedings, the Revenue argued that the payment should be considered capital expenditure based on a Supreme Court decision in a similar case. The Tribunal had erred in treating the payment as revenue expenditure as the benefit acquired by the assessee was of enduring nature, allowing the use of technical know-how even after the agreement period. Citing the decision in a Supreme Court case, it was concluded that the expenditure incurred by the assessee on the technical know-how, which provided enduring benefits, should be treated as capital expenditure. Therefore, the claim of the assessee was disallowed, and the question was answered in favor of the Revenue. The reference was disposed of accordingly, with parties instructed to act on a signed copy of the order.
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