1996 (4) TMI 100 - HC - Income Tax

Business Expenditure, Capital Or Revenue Expenditure, Collaboration Agreement, Foreign Technician

Issues Involved:
1. Entitlement to depreciation on amounts incurred by the assessee for acquiring patents and drawings.
2. Classification of expenses on acquiring patents and drawings as capital or revenue expenditure.
3. Deductibility of expenses incurred on providing tea to customers.
4. Deductibility of payments made to foreign collaborators as revenue expenditure.

Detailed Analysis:

Issue 1: Entitlement to depreciation on amounts incurred for acquiring patents and drawings
The Tribunal held that the assessee was entitled to depreciation on the amounts of Rs. 1,66,54,990, Rs. 11,50,981, and Rs. 11,52,709 incurred during the assessment years 1974-75, 1975-76, and 1976-77, respectively. The High Court upheld this decision, referencing the Supreme Court's ruling in Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86, which determined that technical know-how constituted a depreciable asset. Thus, the Tribunal's decision was affirmed, and the assessee was entitled to depreciation on these amounts.

Issue 2: Classification of expenses on acquiring patents and drawings as capital or revenue expenditure
The Tribunal's finding that the amounts spent by the assessee on acquiring patents and drawings were capital expenditures was upheld. The High Court referenced the Supreme Court's decision in CIT v. Elecon Engineering Co. Ltd. [1987] 166 ITR 66, which affirmed that technical know-how and related documentation constituted a capital asset. Consequently, the amounts of Rs. 1.49 crore paid to Hindustan Steel Limited and Rs. 16,55,980 paid to foreign collaborators were classified as capital expenditures, not deductible as revenue expenditures.

Issue 3: Deductibility of expenses incurred on providing tea to customers
The Tribunal held that the assessee was entitled to deduct Rs. 84,834 and Rs. 1,51,033 incurred on providing tea to customers for the assessment years 1975-76 and 1976-77, respectively. The High Court affirmed this decision, referencing the Supreme Court's ruling in CIT v. Patel Brothers and Co. Ltd. [1995] 215 ITR 165, which clarified that providing ordinary meals to customers according to established business practices did not constitute entertainment expenditure. Thus, the expenses were deductible.

Issue 4: Deductibility of payments made to foreign collaborators as revenue expenditure
The Tribunal initially held that payments of Rs. 11,50,981 and Rs. 11,52,709 for the assessment years 1975-76 and 1976-77, respectively, to foreign collaborators were not deductible as revenue expenditures. However, the High Court reversed this decision, referencing the Supreme Court's ruling in CIT v. Indian Oxygen Ltd. [1996] 218 ITR 337, which held that such payments constituted revenue expenditures. Consequently, the payments were deductible as revenue expenditures, and the Tribunal's decision was overturned.

Conclusion:
The High Court upheld the Tribunal's decision on the entitlement to depreciation and the classification of certain expenditures as capital. However, it reversed the Tribunal's decision on the deductibility of payments to foreign collaborators, classifying them as revenue expenditures. The expenses incurred on providing tea to customers were also affirmed as deductible. There was no order as to costs.

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