1997 (12) TMI 62 - HC - Income Tax

Capital Expenditure, Revenue Expenditure, Collaboration Agreement, Technical Know-how, Gratuity, Question Of Law

Issues Involved:
1. Validity of reopening under section 147(b) of the Income-tax Act, 1961.
2. Allowability of expenditure on gratuity.
3. Nature of expenditure on technical know-how fee (capital or revenue).

Issue-wise Detailed Analysis:

1. Validity of Reopening under Section 147(b):
The Tribunal upheld the reopening of the assessment under section 147(b) of the Income-tax Act, 1961. The assessee did not seriously dispute this finding. Therefore, the court confirmed the Tribunal's decision that the reopening was valid.

2. Allowability of Expenditure on Gratuity:
The Tribunal disallowed the claim for provision for gratuity, and the assessee did not contest this finding before the High Court. Consequently, the court affirmed the Tribunal's decision that the expenditure on gratuity was not allowable.

3. Nature of Expenditure on Technical Know-how Fee:
The primary contention was whether the payment made by the assessee for technical know-how should be regarded as capital expenditure or revenue expenditure. The assessee argued that the payment was for adopting better production methods and improving the quality of products, and thus should be considered revenue in nature. The assessee cited several judgments, including CIT v. Madras Rubber Factory Ltd. [1983] 144 ITR 678, CIT v. Tata Engineering and Locomotives Co. P. Ltd. [1980] 123 ITR 538, and Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746, to support their claim that technical know-how fees should be considered revenue expenditure.

The Revenue, on the other hand, argued that the payment was capital in nature, citing the Supreme Court's decision in Jonas Woodhead and Sons (India) Ltd. v. CIT [1997] 224 ITR 342, which dealt with payments for setting up a new plant.

The court examined the technical collaboration agreement between the assessee and Mitsubishi Heavy Industries Ltd. (M.H.I.). The agreement aimed to adopt better production methods, improve quality, and manufacture new products. The court noted that the assessee was granted a license to use technical information for manufacturing products even after the agreement expired, but was restricted from marking the products with M.H.I.'s name.

The court emphasized that the cumulative effect of the entire agreement should be considered. The assessee was an existing company, and the agreement was for running the business efficiently, not for setting up a new plant. The court concluded that the payment for technical know-how was for the running of the business and not for acquiring a capital asset.

The court referred to the decision in CIT v. Madras Rubber Factory Ltd. [1983] 144 ITR 678, which stated that expenditure impacting the running of the business should be regarded as revenue expenditure. Similarly, the Bombay High Court in CIT v. Tata Engineering and Locomotive Co. P. Ltd. [1980] 123 ITR 538, held that technical know-how for better production methods should be considered revenue expenditure.

The court distinguished the Supreme Court's decision in Jonas Woodhead and Sons (India) Ltd.'s case [1997] 224 ITR 342, as it dealt with setting up a new plant, whereas the present case involved an existing business.

Conclusion:
The court concluded that the Tribunal was not correct in holding that the payment for technical know-how was capital in nature. The payment should be regarded as revenue expenditure. Thus, the second question of law was answered in favor of the assessee regarding the technical know-how fee.

Final Judgment:
1. The reopening under section 147(b) was valid (against the assessee).
2. The expenditure on gratuity was not allowable (against the assessee).
3. The payment for technical know-how fee was revenue expenditure and allowable (in favor of the assessee).

The court decided there would be no order as to costs.

← Previous Next →