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Issues Involved:
1. Nature of Expenditure - Revenue or Capital 2. Allowability of Deduction for Technical Know-How and Information 3. Interpretation of Collaboration Agreements Detailed Analysis: 1. Nature of Expenditure - Revenue or Capital: The primary issue revolves around whether the expenditure incurred by the assessee for acquiring technical know-how and information through the issuance of shares should be treated as a capital or revenue expenditure. The assessee claimed the deduction of Rs. 2,60,000 as a revenue expenditure, arguing that it did not bring into existence any asset or advantage of an enduring nature and that the technical know-how did not become the property of the assessee-company. The department, however, contended that the shares issued for technical know-how constituted a capital asset, providing an enduring benefit to the assessee. The Tribunal concluded that the expenditure was of a capital nature. It emphasized that the technical information and services provided by Diamond and TII were intended to assist in the production or manufacture of goods, and the agreements contemplated continuous and uninterrupted supply of such information. The Tribunal distinguished this case from others where periodic or installment payments were made in cash for technical know-how, and the businesses were already in operation before the collaboration agreements. 2. Allowability of Deduction for Technical Know-How and Information: The assessee argued that the expenditure should be allowed as a deduction under section 37 of the Income-tax Act, 1961, citing various case laws where similar payments were treated as revenue expenditures. The Tribunal, however, noted that in most of these cases, the payments were made in cash and were recurrent, based on the production or sales of the products. In contrast, the present case involved the issuance of shares, which did not constitute an expenditure in cash or transfer of any asset owned by the assessee. The Tribunal referenced several judgments, including the Supreme Court decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692, where payments for technical know-how were allowed as revenue expenditure due to their recurrent nature and dependency on sales. However, the Tribunal found that these precedents were distinguishable because, in the present case, the technical know-how was acquired through the issuance of shares, forming part of the capital structure of the assessee-company. 3. Interpretation of Collaboration Agreements: The Tribunal analyzed the collaboration agreements between the assessee, TII, and Diamond, noting that these agreements were integral to the formation and existence of the assessee-company. The agreements stipulated that the initial capital of the assessee-company would be Rs. 24 lakhs, with shareholding divided between TII and Diamond. The Tribunal highlighted that the agreements aimed to establish a partnership-like relationship between TII and Diamond through the medium of the assessee-company. The Tribunal further noted that the issuance of shares to Diamond and TII did not involve any payment of sums or transfer of assets by the assessee. Instead, it provided Diamond and TII with a right to participate in the management and administration of the assessee-company. The Tribunal concluded that the transaction related to the very framework or capital structure of the assessee-company and did not constitute an expenditure incurred in carrying on its business. Conclusion: The Tribunal dismissed the appeal, holding that the assessee was not entitled to the deduction of Rs. 2,60,000 as a revenue expenditure. It upheld the findings of the departmental authorities that the expenditure was of a capital nature, related to the formation and existence of the assessee-company, and did not involve any payment or transfer of assets by the assessee. The Tribunal emphasized the unique facts and circumstances of the case, distinguishing it from other precedents where payments for technical know-how were allowed as revenue expenditures.
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