1995 (12) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 1,51,500 paid by the assessee to J. R. Geigy Basle u/s the agreement dated July 14, 1965, is allowable as revenue expenditure.

Summary:

Issue 1: Allowability of Expenditure as Revenue Expenditure
The Tribunal submitted references for the same assessee for assessment years 1967-68 to 1970-71, questioning if the amount paid to J. R. Geigy Basle for technical know-how could be claimed as revenue expenditure. The assessee had an agreement with J. R. Geigy Basle from January 1, 1956, for manufacturing products, including Tinopal, which required cyanuric chloride as a raw material. The assessee entered a supplementary agreement on July 14, 1965, for manufacturing cyanuric chloride and paid five equal instalments for the technical know-how, claiming these payments as revenue expenditure.

The Income-tax Officer rejected this claim, viewing the payments as capital expenditure due to the enduring nature of the sub-licence. However, the Commissioner of Income-tax (Appeals) and the Tribunal held that the payments were revenue expenditures, as they were operational costs for running the existing business.

The High Court evaluated the nature of "capital expenditure" and "revenue expenditure," referencing various judicial precedents. The court noted that expenditure bringing an asset or advantage of enduring benefit is typically capital, while expenses for running the business are revenue. The court cited Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) and CIT v. British India Corporation Ltd. [1987] 165 ITR 51 (SC), emphasizing that technical know-how for improving existing business operations is revenue expenditure.

The court concluded that the technical know-how acquired was for manufacturing cyanuric chloride, a raw material for Tinopal, which was part of the assessee's existing business. Hence, the expenditure was for running the business more profitably, not for establishing a new business. Therefore, the expenditure was revenue in nature.

The court affirmed the Tribunal's decision, answering the question in the affirmative, favoring the assessee, and against the Revenue.