1987 (7) TMI 152 - AT - Income Tax

Summary

Issues Involved:
1. Admission of additional ground by CIT (Appeals)
2. Nature of expenditure (capital vs. revenue)
3. Entitlement to development rebate and depreciation

Issue-wise Detailed Analysis:

1. Admission of Additional Ground by CIT (Appeals)
The Revenue contended that the CIT (Appeals) improperly admitted an additional ground raised by the assessee, which argued that the Rs. 2 lakhs paid for technical know-how/drawings should be treated as revenue expenditure. The Revenue relied on the Supreme Court decision in *Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1*. However, the Tribunal noted that the Revenue's authorized ground did not challenge the admission of the additional ground but was directed towards the merits of the issue. The Tribunal found the assessee's reliance on *CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710* and *CIT v. Gangappa Cables Ltd. [1979] 116 ITR 778* to be well-placed, concluding that the additional ground did not require fresh investigation into facts, as they were already on record.

2. Nature of Expenditure (Capital vs. Revenue)
The primary issue was whether the Rs. 2 lakhs paid for technical know-how/drawings should be treated as capital or revenue expenditure. The Revenue argued that the expenditure was capital in nature, citing *CIT v. Elecon Engg. Co. Ltd. [1974] 96 ITR 672* and its affirmation by the Supreme Court in *CIT v. Elecon Engg. Co. Ltd. [1987] 166 ITR 66*. They also referenced the Delhi High Court decisions in *Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746* and *Triveni Engg. Works Ltd. v. CIT [1982] 136 ITR 340*.

The assessee countered, arguing that the machinery manufactured under the agreement was stock in trade and the agreement was for a limited period of five years, with all drawings and technical material to be returned upon termination. This indicated that the expenditure was for the use of information for the profit-earning process, not the acquisition of a capital asset. The Tribunal found the assessee's argument compelling, particularly noting the principles laid down in *Shriram Refrigeration Industries Ltd.* and other Delhi High Court cases, which distinguished between the use of technical know-how and the acquisition of a capital asset. The Tribunal concluded that the expenditure was revenue in nature, as it was for obtaining access to information necessary for running the business.

3. Entitlement to Development Rebate and Depreciation
The assessee initially claimed development rebate and depreciation on the Rs. 2 lakhs paid for technical know-how/drawings. The ITO allowed depreciation but refused the development rebate. The CIT (Appeals) admitted an additional ground and accepted the assessee's contention to treat the expenditure as revenue expenditure, thus negating the need for development rebate. The Tribunal upheld this decision, finding no merit in the Revenue's arguments.

Conclusion:
The Tribunal upheld the CIT (Appeals)'s decision to treat the Rs. 2 lakhs expenditure as revenue expenditure, dismissing the Revenue's appeal. The cross-objection filed by the assessee, which supported the CIT (Appeals)'s decision and sought no fresh relief, was deemed redundant and dismissed as infructuous. The Tribunal also did not entertain a modified cross-objection raised by the assessee at the hearing, as it was filed after the prescribed limitation period.