1986 (7) TMI 186 - AT - Income Tax

Summary

Issues:
1. Treatment of technical know-how fees as revenue or capital expenditure.
2. Allowability of the entire amount of technical know-how fees in a single year.

Analysis:

1. The primary issue in this case revolves around the treatment of technical know-how fees paid by the assessee as revenue or capital expenditure. The IT department initially treated the entire amount as capital expenditure, arguing that the technical know-how had not been utilized to create an enduring benefit. However, the Commissioner (Appeals) disagreed, holding that the fees should be treated as revenue expenditure since no enduring asset was acquired. The Commissioner also emphasized that the fees were payable over five years but should be treated as a liability in the accounting year due to the assessee's mercantile basis of accounting.

2. The second issue concerns the allowability of the entire amount of technical know-how fees in a single year. The departmental representative contended that the fees should not be allowed in one year and that subsequent installments should not be permitted. Conversely, the assessee argued that since the agreement was for a limited period and no enduring asset was acquired, the entire amount should be allowed as revenue expenditure in the current year. Citing precedent from the Bombay High Court, the Tribunal held that the entire amount of fees should be allowed in the current year, following the principle of accrual of liability and revenue expenditure.

3. The Tribunal's analysis was supported by legal precedents such as Praga Tools Ltd. v. CIT, Mysore Kirloskar Ltd. v. CIT, and Empire Jute Co. Ltd. v. CIT, which emphasized that expenditure directly related to the business's profit-making process should be considered revenue expenditure unless it leads to the acquisition of an enduring asset. In this case, the technical know-how acquired did not result in the setting up of new machinery or plant but only related to the process of manufacture, justifying its treatment as revenue expenditure.

4. Ultimately, the Tribunal upheld the Commissioner (Appeals) decision, allowing the entire amount of technical know-how fees as revenue expenditure in the current year. The decision distinguished a previous case cited by the departmental representative, emphasizing that the facts of the current case aligned with the principles established in the legal precedents referenced. As a result, the appeal by the revenue was dismissed, affirming the treatment of the fees as revenue expenditure for the assessment year.