1976 (11) TMI 40 - HC - Income Tax

Capital Employed, Capital Or Revenue, Collaboration Agreement, Computation Of Capital, Deduction From Profits And Gains, Foreign Company, Industrial Undertaking, Initial Depreciation, Revenue Expenditure, Written Down Value

Summary

Issues Involved:
1. Whether the disputed 50% of the technical aid fees paid to Messrs. Joseph Lucas (Industries) Ltd., England, was revenue expenditure and deductible from the income of the assessee.
2. Whether the initial depreciation should be deducted in determining the written down value of assets for computation of capital employed in the newly established industrial undertaking under rule 19 of the Income-tax Rules, 1962.

Detailed Analysis:

Issue 1: Nature of Technical Aid Fees
The primary issue was whether the 50% of the technical aid fees paid by the assessee to the foreign company, Messrs. Joseph Lucas (Industries) Ltd., England, should be considered as revenue expenditure and thus deductible from the income of the assessee.

The assessee, a limited company engaged in the manufacture of electrical equipment, entered into a technical collaboration agreement with the foreign company. The agreement granted the assessee exclusive rights to use the technical knowledge and patents of the foreign company within India. The Income-tax Officer initially held that 50% of the expenditure was capital in nature, suggesting it brought into existence an enduring asset. However, the Appellate Assistant Commissioner reversed this decision, citing the Supreme Court's ruling in Ciba's case [1968] 69 ITR 692 (SC), which held that such payments were revenue expenditure.

The Tribunal upheld the Appellate Assistant Commissioner's decision, stating that the principles laid down in Ciba's case applied to the present case. The Supreme Court in Ciba's case had pointed out that the assessee did not acquire any capital asset but merely had access to technical knowledge for a limited period. The High Court agreed with this reasoning, noting that the terms of the agreement, such as the prohibition on divulging confidential information and the recurrent nature of payments, indicated that the assessee did not acquire any enduring advantage.

The High Court concluded that the entire payments made by the assessee to the foreign company were in the nature of a licence fee and thus constituted an item of expenditure in the computation of its profits and gains. Therefore, the first question was answered in the affirmative and in favor of the assessee.

Issue 2: Initial Depreciation and Written Down Value
The second issue concerned the interpretation of rule 19 of the Income-tax Rules, 1962, specifically whether initial depreciation should be deducted in determining the written down value of assets for the computation of capital employed in a newly established industrial undertaking.

Rule 19(1) and (6) of the Income-tax Rules, 1962, read with section 43(6) of the Income-tax Act, 1961, were examined. Section 43(6) defines "written down value" and includes a proviso stating that initial depreciation should not be included in the expression "depreciation actually allowed." The Tribunal held that initial depreciation should not be deducted for computing the written down value for the purpose of calculating capital under section 84 of the Income-tax Act, 1961.

The High Court agreed with the Tribunal's interpretation, rejecting the revenue's argument that initial depreciation should be deducted only for purposes of section 32(1)(ii) and not for rule 19. The Court emphasized that rule 19(6) refers back to section 43(6), which includes the proviso excluding initial depreciation from "depreciation actually allowed."

Therefore, the second question was also answered in the affirmative and in favor of the assessee.

Conclusion:
Both issues were resolved in favor of the assessee. The High Court held that the disputed 50% of the technical aid fees was revenue expenditure and deductible, and that initial depreciation should not be deducted in determining the written down value of assets for the computation of capital employed under rule 19 of the Income-tax Rules, 1962. The assessee was entitled to costs, with counsel's fee fixed at Rs. 500.