1993 (1) TMI 64 - HC - Income Tax

Summary

Issues Involved:
1. Whether apprentices employed by the assessee are considered employees for the purpose of initial depreciation u/s 32(1)(iv) of the Income-tax Act, 1961.
2. Whether the sum of Rs. 1,73,849 paid by the assessee to Messrs. Harnischfeger Corporation, U.S.A., is an admissible revenue deduction for the assessment year 1968-69.

Summary:

Issue 1: Apprentices as Employees for Initial Depreciation u/s 32(1)(iv)
The primary contention was whether apprentices could be considered "persons employed in the business" of the assessee, thereby entitling the assessee to initial depreciation at 20% of the actual cost for buildings constructed for their welfare. The Revenue argued that apprentices are merely trainees and not employees, thus not meeting the requirements of section 32(1)(iv). The assessee countered that the term "employed in the business" should be interpreted broadly to include all persons engaged in the business, including apprentices. The court, referencing the Court of Appeal's decision in Reece v. Ministry of Supply and Ministry of Works and Planning [1945] and the Supreme Court's decision in CBDT v. Aditya V. Birla [1988], concluded that the term "employed" should be read as "engaged." Therefore, apprentices fall within the expression "persons employed in the business," and the assessee is entitled to initial depreciation for the apprentice school and shop buildings. The first question was answered in favor of the assessee.

Issue 2: Allowability of Royalty Payment as Revenue Deduction
The second issue was whether the payment of Rs. 1,73,849 to Messrs. Harnischfeger Corporation, U.S.A., was a revenue or capital expenditure. The Tribunal found that the amount was due and payable during the relevant year, making it a question of fact. The court examined the agreement and determined that the payment was connected with the manufacturing and selling of the assessee's products, payable at 2.5% of the net sale prices. The court emphasized that the nature of the expenditure, its purpose, and its intended effect should be considered in a practical and business-oriented manner. Citing the Supreme Court's decisions in Alembic Chemical Works Co. Ltd. v. CIT [1989] and Empire Jute Co. Ltd. v. CIT [1980], the court concluded that the payment was a revenue expenditure. The second question was also answered in favor of the assessee.

Conclusion:
Both questions were answered in the affirmative, in favor of the assessee and against the Revenue. No order as to costs.