1979 (2) TMI 97 - HC - Income Tax

Business Expenditure, Collaboration Agreement, Enduring Nature, Foreign Company, Income Tax Act, Indian Company

Summary

Issues Involved:
1. Whether the payment of Rs. 5,95,000 and Rs. 5,96,000 by the assessee represented capital expenditure and was therefore not deductible in arriving at the income of the assessee.

Issue-wise Detailed Analysis:

1. Nature of Expenditure:
The primary issue in both I.T.R.C. No. 116 of 1974 and I.T.R.C. No. 117 of 1974 was whether the sums of Rs. 5,95,000 and Rs. 5,96,000 paid by the assessee, Indian Telephone Industries Ltd., Bangalore, towards acquiring technical know-how under agreements with the Government of India and foreign entities, constituted capital expenditure or revenue expenditure. The Income-tax Appellate Tribunal held these payments as capital expenditure, thus not deductible under s. 37 of the I.T. Act.

2. Tribunal's Reliance on Previous Case Law:
The Tribunal's decision was based on the precedent set in Mysore Kirloskar Ltd. v. CIT [1968] 67 ITR 23 (Mys), which was later overruled by a Full Bench of the same court in Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443 (Mys), following the Supreme Court's ruling in CIT v. Ciba of India Ltd. [1968] 69 ITR 692. Thus, the Tribunal's reliance on the first Mysore Kirloskar's case was misplaced as it was no longer good law.

3. Tests for Determining Capital vs. Revenue Expenditure:
The Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 laid down the tests to distinguish between capital and revenue expenditure. These tests consider whether the expenditure is for acquiring an asset or advantage of an enduring benefit (capital) or for running the business to produce profits (revenue).

4. Application of Supreme Court's Ruling in Ciba's Case:
In CIT v. Ciba of India Ltd. [1968] 69 ITR 692, the Supreme Court held that payments for acquiring technical know-how were revenue expenditure if the assessee merely obtained access to the technical knowledge for a limited period without acquiring any enduring asset. The assessee in the present case, similar to Ciba, acquired the right to use technical know-how for a limited period without transferring any asset or enduring advantage.

5. Undisputed Facts and Analysis:
The court noted the following undisputed facts:
- The assessee was already in the business of manufacturing telephone exchange equipment.
- The agreements provided the right to use technical know-how for manufacturing and selling "Pentaconta" cross-bar exchanges.
- The agreements were valid for seven years, with no right to transfer the know-how to third parties.
- The technical know-how was subject to rapid obsolescence due to ongoing research and development in telecommunications.

Based on these facts, the court concluded that the payments were for acquiring technical know-how to improve business prospects and meet transitional requirements, not for acquiring an enduring asset.

Conclusion:
The court held that the Tribunal erred in categorizing the expenditure as capital. The payments were revenue in nature and thus deductible under s. 37 of the Act. The question was answered in the negative and in favor of the assessee, allowing the deduction of the sums paid.

Costs:
The court ordered that each party bear its own costs.