1998 (7) TMI 20 - HC - Income Tax

Capital Or Revenue Expenditure, Technical Know-how, Depreciation, Plant, Business Expenditure, Entertainment Expenditure

Summary

Issues:
1. Whether the payment made for technical know-how and information is capital expenditure or revenue expenditure.
2. Whether depreciation can be allowed on the capital expenditure incurred for acquiring technical know-how in the form of drawings.
3. Whether entertainment expenses are allowable as a deduction.

Issue 1: Payment for Technical Know-How

The agreement between the assessee and a Swiss company involved the transfer of know-how for manufacturing new products, with the Swiss company providing drawings and technical assistance. The payment for services was divided into transfer of information and royalty. The assessee claimed the payment as revenue expenditure, but the Assessing Officer disallowed 80% as capital expenditure. The Tribunal upheld the disallowance. The Revenue argued that drawings do not constitute depreciable assets. The assessee relied on a Supreme Court decision regarding know-how acquisition for an existing product, but the court found it inapplicable as the current case involved setting up a new plant for new products. Another case cited by the Revenue emphasized distinguishing between new technology acquisition and product improvement. The court concluded that the payment for know-how and information, categorized as capital and revenue by the parties, primarily constituted capital expenditure.

Issue 2: Depreciation on Technical Know-How

The question of whether depreciation could be allowed on the capital expenditure for acquiring technical know-how in the form of drawings was raised. The Supreme Court precedent highlighted that documentation services, including drawings, could be considered "plant" for depreciation if they aided in the trading activity. The court ruled in favor of the assessee, allowing depreciation on the portion of the technical know-how fee directed to be capitalized.

Issue 3: Entertainment Expenses Deduction

The Revenue contested the deletion of entertainment expenses by the Tribunal, arguing that such expenses were not deductible post an amendment to the Act. The court sided with the Revenue, upholding the disallowance of the entertainment expenses as a deduction. The amendment to the Act restricted the deduction of such expenses post a specific date.

In conclusion, the court determined that the payment for technical know-how and information constituted capital expenditure, allowing depreciation on the capitalized portion. Entertainment expenses were not deductible post an amendment to the Act. The judgment provides clarity on the treatment of expenditures and depreciation related to technical know-how acquisition and underscores the importance of categorizing expenses accurately for tax purposes.