2000 (2) TMI 7 - SC - Income Tax

Appellant-assessee is a company - High Court has rightly concluded that allotment of equity shares by the appellant to Eimco in the circumstance of the case cannot be termed as expenditure much less revenue expenditure and rightly answered the question referred to it against the appellant-assessee

Summary

Issues:
1. Challenge to the order passed by the Division Bench of the High Court of Madras in Tax Cases.
2. Applicability of section 263 of the Income-tax Act, 1961.
3. Treatment of Rs. 2,35,000 paid to a foreign collaborator as revenue expenditure.
4. Interpretation of section 37(1) of the Income-tax Act regarding expenditure for business purposes.

Analysis:
1. The appellant, a registered company, challenged the order passed by the Division Bench of the High Court of Madras in Tax Cases, where the High Court ruled against the appellant. The case involved the deduction of Rs. 2,35,000 as revenue expenditure paid to a foreign collaborator for technical know-how. The Income-tax Officer treated it as capital expenditure, but the Appellate Tribunal later allowed the deduction as revenue expenditure. Subsequently, questions were referred to the High Court regarding the Commissioner's power under section 263 of the Income-tax Act. The High Court answered both questions against the appellant.

2. The applicability of section 263 of the Income-tax Act was a crucial issue in the case. The appellant's challenge to the Commissioner's revision of the Income-tax Officer's order under section 263 was addressed. The court confirmed the High Court's decision based on relevant legal precedents and upheld the Commissioner's power to revise the order, as established in previous judgments.

3. The main contention revolved around whether the payment of Rs. 2,35,000 to the foreign collaborator constituted revenue expenditure. The appellant argued that the amount was spent to acquire technical know-how and should be considered revenue expenditure. However, the court analyzed the nature of the payment and concluded that it was part of the capital contribution by the foreign collaborator, not an expenditure incurred by the appellant for the purchase of know-how. The court referred to section 37(1) of the Income-tax Act, emphasizing that the expenditure should be wholly and exclusively for the business's purpose, which was not the case here.

4. The interpretation of section 37(1) of the Income-tax Act was crucial in determining whether the payment to the foreign collaborator could be considered revenue expenditure. The court examined the specific provisions of the Act and relevant legal principles to conclude that the payment made by the appellant was not an allowable expenditure under section 37(1). The court differentiated the case from precedents where similar payments were considered revenue expenditure based on the specific circumstances and purpose of the expenditure. Ultimately, the court dismissed the appeals, upholding the High Court's decision against the appellant.