1981 (3) TMI 49 - HC - Income Tax

Summary

Issues Involved:
1. Disallowance of 2/3rds of foreign tour expenses of the director as capital expenditure.
2. Disallowance of Rs. 16,029 paid to M/s. G. Perry & Sons Ltd., England, as capital expenditure.

Summary:

Issue 1: Disallowance of 2/3rds of Foreign Tour Expenses
The court examined whether the disallowance of 2/3rds of the foreign tour expenses of the technical director, Shri Vinod L. Doshi, was justified as capital expenditure. The ITO attributed 2/3rds of the total expenditure to negotiations for technical collaboration and purchase of machinery, deeming it capital expenditure. The AAC upheld this, noting the absence of a report or evidence detailing the activities during the tour. The Tribunal confirmed the findings, stating the tour aimed at finalizing machinery purchases and technical collaborations, which would contribute to the profit-making apparatus, thus capital in nature. The court agreed, emphasizing the lack of evidence on the actual purpose of the expenses, and upheld the disallowance of 2/3rds of the expenses as capital expenditure.

Issue 2: Disallowance of Rs. 16,029 Paid to M/s. G. Perry & Sons Ltd.
The court considered whether the payment of Rs. 16,029 to M/s. G. Perry & Sons Ltd. for pattern shop collaboration was capital expenditure. The ITO and AAC treated it as capital expenditure, viewing it as a purchase of the right to use specialized processes and knowledge. The Tribunal upheld this, distinguishing it from the CIT v. Ciba of India Ltd. case, and likened it to Mysore Kirloskar Ltd. v. CIT. However, the court disagreed, referencing the Supreme Court's decision in CIT v. Ciba of India Ltd., which held that technical know-how and advice do not constitute a capital asset. The court noted that the agreement was for acquiring technical knowledge and services, not a tangible asset, and thus the expenditure was revenue in nature. Consequently, the Tribunal's finding was reversed.

Conclusion:
1. The ITO was justified in disallowing 2/3rds of the foreign tour expenses of the technical director as capital expenditure.
2. The ITO was not justified in treating the expense of Rs. 16,029 paid to M/s. G. Perry & Sons Ltd. as capital expenditure.

Both the assessee and the department succeeded partly, with no order as to costs.