1986 (11) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Whether the payment of Rs. 56,989 by the assessee for technical know-how was capital or revenue expenditure.
2. Interpretation and application of the agreement dated September 14, 1964, between the assessee and M/s. Taylor & Challen Ltd.
3. Applicability of the Supreme Court decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692.

Summary:

Issue 1: Nature of Expenditure
The primary issue was whether the payment of Rs. 56,989 by the assessee to the British company for technical know-how was a capital expenditure or a revenue expenditure. The Commissioner of Income-tax initiated proceedings u/s 263 of the Income-tax Act, 1961, and held that the expenditure was capital in nature, as it brought into existence a benefit of an enduring character. The Income-tax Appellate Tribunal, however, concluded that the payment constituted a revenue expenditure, stating that the principles laid down by the Supreme Court in Ciba of India Ltd. [1968] 69 ITR 692 applied. The Tribunal noted that the payment of a lump sum for obtaining know-how did not result in an enduring benefit to the assessee.

Issue 2: Interpretation of the Agreement
The agreement dated September 14, 1964, between the assessee and M/s. Taylor & Challen Ltd. involved the supply of technical know-how for the manufacture of power press machines. The agreement was initially for 10 years and could be extended unless terminated by either party with one year's notice. The Tribunal found that the agreement did not confer any enduring benefit or permanent asset to the assessee, as the know-how remained the property of the British company, and the assessee only had the user rights during the agreement's term.

Issue 3: Applicability of the Supreme Court Decision
The Tribunal and the High Court both relied on the Supreme Court decision in Ciba of India Ltd. [1968] 69 ITR 692, where it was held that payments for obtaining technical know-how were revenue expenditures. The High Court distinguished the facts of the present case from those in other cited decisions, such as Scientific Engineering House P. Ltd. [1986] 157 ITR 86, where the technical know-how was treated as a capital asset. The High Court held that the assessee had not acquired a new line of business but was utilizing the technical know-how to manufacture new machines within its existing business framework.

Conclusion:
The High Court concluded that the payment of Rs. 56,989 by the assessee was not for obtaining a permanent asset or an enduring benefit but for the limited use of technical know-how for a specified period. Thus, the expenditure was a revenue expenditure. The question referred to the court was answered in the negative and in favor of the assessee, affirming the Tribunal's order. There was no order as to costs.