1987 (9) TMI 99 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of technical know-how fees as revenue expenditure.
2. Determination of the assessment year for the deduction.
3. Classification of expenditure as capital or revenue.

Detailed Analysis:

1. Deduction of Technical Know-How Fees as Revenue Expenditure:
The appellant, a public limited company involved in manufacturing road-making and construction machinery, claimed a deduction of Rs. 8,12,095 as technical know-how fees paid to two West German companies, DEMAG and Weyhausen. The CIT (Appeals) accepted the deduction of Rs. 1,85,724 paid to DEMAG as revenue expenditure for the assessment year 1982-83. However, the amount of Rs. 6,26,371 payable to Weyhausen was not allowed as a deduction for the same year. The appellant argued that the amount paid for acquiring technical know-how from Weyhausen was admissible as revenue expenditure.

2. Determination of the Assessment Year for the Deduction:
The CIT (Appeals) held that the amount payable to Weyhausen could not be allowed either on a cash basis or on a mercantile basis for the assessment year 1982-83. The appellant contended that the liability to pay DM 1,50,000 arose during the accounting year ended 31-12-1981 when the production of wheel loaders commenced. The CIT (Appeals) found that the company did not start the manufacture of wheel loaders within the relevant accounting year and thus, the payment did not pertain to the assessment year 1982-83. The Tribunal upheld this view, citing the decision of the Madras High Court in Addl. CIT v. Southern Structurals Ltd., which emphasized that the production of a proto-type does not equate to the commencement of commercial production.

3. Classification of Expenditure as Capital or Revenue:
The CIT (Appeals) did not address whether the payment to Weyhausen was capital or revenue expenditure, as the primary issue was the timing of the deduction. The Tribunal agreed that this issue would need to be decided in a future assessment year by the Income-tax Officer in Calcutta, considering the amalgamation of the appellant with its holding company effective from 1-1-1982.

Conclusion:
The Tribunal concluded that the appellant was not entitled to the deduction of Rs. 6,26,371 for the assessment year 1982-83. The commencement of production and the actual manufacture of the final product, AR-61 Wheel Loaders, occurred after the relevant accounting year. Thus, the CIT (Appeals) correctly rejected the appellant's claim for deduction in the year under appeal. The appeal was dismissed, and the Tribunal upheld the decision of the CIT (Appeals).