2011 (11) TMI 515 - HC - Income Tax

Royalty payment - obtaining new technology and know-how and rights and services - capital expenditure v/s revenue expenditure - Held that - Licence that was granted does not confer any proprietary right in obtaining technical know-how, the licence is granted as per the agreement subject to payment of royalty to make use of know-how and technology. The royalty payable is depending upon the sales made and export. Mere fact that said know-how and patent has been acquired even before commencement of production in this case would not in any way material itself having regard to the agreement and payment of royalty. Therefore, expenditure made towards royalty is revenue expenditure - Decided against the Revenue. Foreign tour expenses of wife of the president of company - capital v/s revenue - Held that - Tribunal allowed the expenditure on finding that wife of the President of the respondent-company accompanied the President to the Budget Conference to discharge social obligation and visit was towards part of the business of the assessee - no infirmity found in the order - Decided against the Revenue. Depreciation on discarded assets - A.O. following block of assets method reduced value of discarded assets from block of assets thus adding back proportionate depreciation to total income - Held that - It is well settled that depreciation can be claimed only in respect of machinery that are used in the manufacture of the product and when certain machinery out of the block assets have been discarded, the question of claiming depreciation for the machinery would not arise. Therefore, depreciation claimed has to be proportionately reduced in respect of the machineries discarded - in favour of Revenue.

Summary

Issues Involved:
1. Classification of royalty payment as capital or revenue expenditure.
2. Deductibility of foreign tour expenses of the President's wife.
3. Allowability of depreciation on discarded assets.

Issue-wise Detailed Analysis:

1. Classification of Royalty Payment:
The primary issue was whether the royalty payment of Rs. 28,07,950/- to M/s. Luwa Switzerland should be treated as capital expenditure or revenue expenditure. The assessee contended that the payment was a recurring expense based on sales, thus qualifying as revenue expenditure. The assessing officer, however, classified it as capital expenditure, arguing that the payment was for acquiring technology and know-how essential for manufacturing. The ITAT reversed this finding, relying on the terms of the agreement, which did not confer any proprietary rights but merely granted a license to use the technology. The ITAT's decision was supported by precedents, including the Supreme Court's ruling in CIT v. Ciba of India Ltd. and CIT v. I.A.E.C. (Pumps) Ltd., which differentiated between acquiring a capital asset and incurring a recurring expense for operational purposes. The High Court upheld the ITAT's decision, emphasizing that the payment was linked to sales and exports, thus constituting revenue expenditure.

2. Deductibility of Foreign Tour Expenses:
The second issue addressed whether the foreign tour expenses of Rs. 1,43,699/- for the President's wife were deductible for business purposes. The assessing officer disallowed 50% of the expenses, citing a lack of evidence that the wife's presence was for business purposes. The appellate authority confirmed this disallowance. However, the ITAT allowed the deduction, referencing the Kerala High Court's decision in CIT v. Apollo Tyres Ltd., which recognized the business necessity of social obligations. The ITAT found that the President's wife accompanied him for a budget conference, a business-related event. The High Court agreed with the ITAT, noting that the travel was part of the business obligations and thus deductible.

3. Allowability of Depreciation on Discarded Assets:
The third issue was whether the assessee could claim depreciation on assets that had been discarded. The assessing officer reduced the depreciation by Rs. 22,442/-, arguing that discarded assets should not be included in the depreciation calculation. The appellate authority upheld this view. However, the ITAT reversed the decision, allowing full depreciation on the block of assets. The High Court disagreed with the ITAT, stating that depreciation should only be claimed on assets used in production. Since the discarded assets were not in use, the reduction in depreciation was justified. The High Court restored the appellate authority's decision to proportionately reduce the depreciation.

Conclusion:
The High Court partially allowed the appeal. It confirmed the ITAT's findings that the royalty payment was revenue expenditure and that the foreign tour expenses of the President's wife were deductible. However, it reversed the ITAT's decision on depreciation, reinstating the reduction for discarded assets. The final order upheld the assessing officer's and appellate authority's treatment of depreciation but sided with the ITAT on the other two issues.