1984 (6) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Nature of expenditure (capital or revenue) incurred by the assessee-company.
2. Comparison of two agreements dated December 30, 1964, and April 8, 1966.
3. Determination of whether the expenditure results in the creation of an asset of enduring benefit.

Issue-wise Detailed Analysis:

1. Nature of Expenditure:
The primary issue is whether the expenditure of Rs. 5,04,799 incurred by the assessee-company for the assessment year 1970-71 is revenue in nature either in whole or part. The Income Tax Officer (ITO) allowed the expenditure as revenue expenditure, but the Commissioner revised this order under section 263 of the I.T. Act, holding it as capital expenditure. The Tribunal, however, allowed the assessee's claim, treating the expenditure as revenue in nature.

2. Comparison of Two Agreements:
The assessee entered into two agreements with Johns-Manville Corporation (J-M). The first agreement dated December 30, 1964, was for the supply of technical know-how for manufacturing machinery (plant and machinery installation). The second agreement dated April 8, 1966, was for obtaining technical know-how and assistance for manufacturing products (pressure pipes). The Commissioner viewed both agreements as similar, treating the second agreement as a continuation of the first, thus considering the expenditure as capital. However, the Tribunal found that the second agreement was distinct and aimed at improving and maintaining the quality of products already manufactured, not for installing any plant or machinery.

3. Determination of Enduring Benefit:
The court analyzed whether the expenditure resulted in the creation of an asset of enduring benefit. The dominant intention of the second agreement was to get technical assistance for manufacturing products, not for erecting any machinery or plant. The agreement was for seven years, with non-exclusive rights, and no trade mark or patent rights were granted. The court referred to several precedents, including Praga Tools Ltd. v. CIT [1980] 123 ITR 773 (AP) [FB], which held that expenditure directly related to the carrying on of business and not for acquiring an asset of enduring nature should be treated as revenue expenditure.

The court concluded that the second agreement was for the purpose of improving the quality of products and obtaining the latest technological improvements, not for acquiring any capital assets. The expenditure was related to the profit-making process and hence was revenue in nature.

Conclusion:
The court answered the reference in the affirmative, holding that the expenditure incurred by the assessee-company was revenue in nature, thereby favoring the assessee. The Tribunal's decision to treat the expenditure as revenue was justified based on the analysis of the agreements and relevant legal principles.