1991 (3) TMI 206 - AT - Income Tax

Summary

Issues Involved:
1. Classification of expenditure on acquisition of technical know-how as revenue or capital expenditure.
2. Applicability of the Andhra Pradesh High Court's decision in Praga Tools Ltd. v. CIT.
3. Treatment of lump sum payments versus royalty payments for technical know-how.

Detailed Analysis:

1. Classification of Expenditure on Acquisition of Technical Know-How as Revenue or Capital Expenditure:
For the assessment years 1974-75, 1975-76, 1979-80, 1980-81, 1982-83, and 1983-84, the Income-tax Officer initially accepted the assessee's claim that amounts paid for acquiring technical know-how were revenue expenditures. However, the Commissioner of Income-tax, under section 263, set aside these assessments, considering them erroneous and prejudicial to the interests of the revenue. The Income-tax Officer subsequently made re-assessments rejecting the assessee's claim. The Commissioner of Income-tax (Appeals) later accepted the assessee's claim, leading to the revenue's appeal.

2. Applicability of the Andhra Pradesh High Court's Decision in Praga Tools Ltd. v. CIT:
The Tribunal noted that for the assessment years 1973-74, 1976-77, 1977-78, and 1981-82, the issue was covered by the Full Bench decision of the Andhra Pradesh High Court in Praga Tools Ltd. v. CIT [1980] 123 ITR 773, where the expenditure on technical know-how was treated as revenue expenditure. The Tribunal found that the present case was similar, as the payments were made for acquiring knowledge necessary for manufacturing machines, which was part of the assessee's business.

3. Treatment of Lump Sum Payments Versus Royalty Payments for Technical Know-How:
The revenue contended that the lump sum payments for acquiring technical know-how were capital expenditures, as they were made once for all and conferred proprietary rights to the assessee. In contrast, the royalty payments were accepted as revenue expenditures. The Tribunal, however, disagreed, stating that the nature of the payment (lump sum or royalty) does not change the purpose of the expenditure, which was to acquire knowledge for manufacturing machines, a part of the assessee's business operations.

Conclusion:
The Tribunal dismissed the revenue's appeals, holding that the expenditure incurred by the assessee for acquiring technical know-how was revenue in nature. The Tribunal emphasized that the payments were made for the purpose of carrying on the business of manufacturing machines, not for acquiring a capital asset. The Tribunal relied on several judicial precedents, including the Andhra Pradesh High Court's decisions in Praga Tools Ltd. and Veljan Hydrair (P.) Ltd. v. CIT, the Bombay High Court's decision in CIT v. Tata Engg. & Locomotive Co. (P.) Ltd., and the Supreme Court's decisions in Empire Jute Co. Ltd. v. CIT and Alembic Chemical Works Co. Ltd. v. CIT. The Tribunal concluded that the payments made by the assessee for acquiring technical know-how were integral to its profit-making process and should be treated as revenue expenditures.