2017 (9) TMI 733 - HC - Income Tax

Depreciation on boiler leased by the assessee - AO termed this as a colourable device to avoid tax - Held that - It cannot be said that the assessee bought and leased back the asset to M/s. Bombay Dyeing solely for the purpose of avoiding tax. The assessee is earning rental income from the transaction which was subjected to tax. If it was not a bona fide business transaction, the assessee, after claiming benefit of depreciation in one year, could not have subjected itself to tax on the income arising from that very transaction. This was taken by the Tribunal to be an important feature of the transaction and the matter as a whole. It is in these circumstances, and looking at the issue in an overall manner, that the Tribunal held that the transaction cannot be termed as dubious or colourable device, but a genuine business transaction. - In arriving at the conclusion that the transaction was genuine, therefore, the Tribunal has not misdirected itself, nor its conclusion can be termed as perverse. Technical know how fees - allowable revenue expenditure - whether expenses resulted in bringing into production of new types of machines and know how was to become the property of the assessee which clearly amounts to capital expenditure? - Held that - The Tribunal has found in this case that the Assessing Officer was in error in holding that the expenditure was not a revenue expenditure. - the assessee was already in possession of the technology which required updation. The updated technology was mainly aimed at reduction and control of heat requirement, upgrading of existing equipment and general cost production. - in this age of vast advancing technology, it is difficult to hold that the technology acquired by the assessee would be enduring. No new asset is required by the assessee. - To be allowed as revenue expenditure. Revenue appeal dismissed.

Summary

Issues Involved:

1. Whether the Tribunal was justified in allowing depreciation on a boiler leased by the assessee to M/s. Bombay Dyeing & Mfg. Co. Ltd. despite claims of it being a tax avoidance device.
2. Whether the Tribunal was justified in allowing technical know-how fees as revenue expenditure, despite claims it amounted to capital expenditure.

Issue-wise Detailed Analysis:

1. Depreciation on Boiler Lease Transaction:

The Tribunal allowed depreciation on a boiler valued at ?1.65 crores leased by the assessee to M/s. Bombay Dyeing & Manufacturing Company Limited. The Assessing Officer termed this transaction as a colourable device to avoid tax, noting that the assessee claimed 100% depreciation on the boiler, which was purchased from and leased back to M/s. Bombay Dyeing. The Assessing Officer concluded that this arrangement between two closely connected companies was aimed at reducing the assessee's taxable profits, while M/s. Bombay Dyeing, with allowances on its DMT plant, was not likely to have taxable profits. The Tribunal, however, found that the boiler was given on lease on 27th September 1984, post the amendment of the assessee's Memorandum of Association on 23rd March 1984, which included leasing business. The Tribunal noted that the transaction was genuine, as the assessee earned rental income subjected to tax, and thus, it could not be termed as a device solely for tax avoidance. The Tribunal distinguished the facts from the Mcdowell's case, where arrangements solely for not paying tax were termed as colourable devices. The Tribunal's conclusion was that the transaction was a bona fide business deal, not a dubious or colourable device.

2. Technical Know-How Fees as Revenue Expenditure:

The Tribunal allowed the technical know-how fees amounting to ?25,68,323/- as revenue expenditure. The Assessing Officer had concluded that the payment made to M/s. American Cynamide Limited for technology transfer was a capital expenditure, as it resulted in an enduring benefit and acquisition of new process technology. The Tribunal, however, found that the assessee was already in the business of manufacturing laminates and the updated technology aimed at reducing heat requirement and upgrading existing equipment was supplemental to the existing business. The Tribunal referred to the Supreme Court's judgment in Alembic Chemical Works Co. Ltd., which clarified that expenses for improvisation in process and technology in existing business are revenue in nature. The Tribunal concluded that the expenditure was for updating and improving the manufacturing process, not for acquiring a new asset, and thus allowed it as revenue expenditure.

Conclusion:

The High Court upheld the Tribunal's findings on both issues. It concluded that the Tribunal's detailed analysis and factual findings were not perverse or vitiated by any error of law. The Tribunal's decision to allow depreciation on the boiler lease transaction and to treat the technical know-how fees as revenue expenditure was based on a thorough appraisal of relevant materials and legal principles. Consequently, the appeal was dismissed without any order as to costs.