1978 (4) TMI 86 - HC - Income Tax

Capital Asset Capital Employed Capital Or Revenue Expenditure Foreign Company Income Tax Act Income Tax Rules New Industrial Undertaking

Summary

Issues:
1. Whether the land purchased by the assessee-company was considered an asset of the undertaking for the purpose of computing relief under section 80J?
2. Whether the payment made to a Swiss company for technical know-how was correctly treated as capital expenditure and not revenue expenditure?

Analysis:

Issue 1:
The High Court of Karnataka addressed the first issue regarding the classification of the land purchased by the assessee-company as an asset of the undertaking for section 80J relief computation. The Income-tax Officer had valued the land below the purchase price, leading to a disallowance of a portion of the amount claimed. The Tribunal agreed with the department's argument that since the land had not been utilized for the intended factory, it could not be considered an asset of the undertaking. However, the Court emphasized that section 80J focuses on the capital employed in the industrial undertaking, not the actual use of specific assets. Citing precedents from the High Courts of Calcutta and Madras, the Court highlighted that once capital is utilized to acquire assets for business, it remains employed in the business irrespective of the asset's usage. Therefore, the Court ruled in favor of the assessee, stating that the actual cost of the land should be included in the section 80J benefit calculation.

Issue 2:
The second issue revolved around the treatment of a payment made to a Swiss company for technical know-how as either capital or revenue expenditure. The agreement between the assessee and the foreign company detailed the nature of the payment for technical assistance. The Tribunal and lower authorities had categorized this payment as capital expenditure based on a previous court decision. However, the High Court referenced a recent judgment overturning the earlier decision, emphasizing that the expenditure was for intangible technical know-how essential for the business's profit-making activities. As such, the Court concluded that the payment should be considered revenue expenditure and allowed. Therefore, the Court answered the second question in favor of the assessee.

In conclusion, the High Court of Karnataka ruled in favor of the assessee on both issues, directing the inclusion of the land's actual cost in the section 80J benefit calculation and recognizing the payment for technical know-how as revenue expenditure. The Court made these determinations based on the interpretation of relevant legal provisions and precedents, ensuring a fair assessment of the tax implications for the assessee.