1975 (3) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Nature of the expenditure (capital or revenue) related to the technical know-how and data.
2. Applicability of the principles from previous judgments on similar issues.
3. Determination of whether the expenditure provided an enduring benefit or asset.

Issue-wise Detailed Analysis:

1. Nature of the expenditure (capital or revenue) related to the technical know-how and data:

The assessee-company entered into an agreement with a foreign company to obtain technical know-how and data necessary for manufacturing leather belting. The Income-tax Officer disallowed the deduction of payments made under this agreement, viewing them as capital expenditure. The Appellate Assistant Commissioner, however, considered the payments as revenue expenditure, reasoning that the fee was for the use of technical data and not for acquiring a capital asset. The Tribunal reversed this, holding that the payments were for acquiring a capital asset, providing an enduring benefit to the assessee.

2. Applicability of the principles from previous judgments on similar issues:

The judgment referenced several cases to elucidate the nature of know-how and its classification as a capital or revenue expenditure. Key cases included:

- Evans Medical Supplies Ltd. v. Moriarty: The House of Lords held that the sum received for disclosing secret processes was a capital receipt, as the know-how was a capital asset.
- Jeffrey v. Rolls-Royce Ltd.: The House of Lords held that sums received for imparting know-how were revenue receipts, emphasizing that know-how is an intangible asset that can be exploited without diminishing its value to the owner.
- Musker v. English Electric Co. Ltd.: The House of Lords held that payments for imparting manufacturing techniques were revenue receipts, distinguishing it from cases where the know-how was sold outright.

The court also discussed the Supreme Court decision in Commissioner of Income-tax v. Ciba of India Ltd., where payments for technical know-how were considered revenue expenditure due to the temporary nature of the rights granted and the obligation to return the technical data after the agreement period.

3. Determination of whether the expenditure provided an enduring benefit or asset:

The court concluded that the assessee acquired an asset of enduring benefit. The agreement did not limit the use of technical data to the duration of the agreement, nor did it require the return of the data after the agreement ended. This lack of limitation implied that the assessee could use the technical data indefinitely, thus acquiring a lasting benefit.

Conclusion:

The court held that the payments made by the assessee for technical know-how were capital expenditures, as they provided an enduring benefit. The reference was answered in the negative, against the assessee, with costs. The court emphasized that the nature of the expenditure, whether capital or revenue, depends on the aim and object of the expenditure, not merely on the manner of payment.