1979 (4) TMI 80 - AT - Income Tax

Summary

Issues:
Whether the payment made by the assessee to its Managing Director for technical know-how in the manufacture of sports goods constitutes a capital expenditure or a revenue expenditure.

Analysis:
The case involved two appeals by the Department concerning the payment of Rs. 11,000 for each year to the Managing Director for acquiring technical know-how in manufacturing sports goods. The assessee claimed it as a revenue expenditure, while the Department treated it as a capital expenditure. The Managing Director transferred assets and liabilities to the company and was paid a sum for imparting technical knowledge over three years.

The Income Tax Officer (ITO) considered the expenditure as capital, stating that the company received enduring benefits from the technical know-how. The Appellate Authority Commissioner (AAC) disagreed, treating the payments as revenue expenditure based on precedents. The Departmental Representative argued that the company acquired an enduring asset, citing a Madras High Court decision.

The counsel for the assessee contended that the company only acquired the right to use the technical knowledge, which did not result in a permanent benefit due to the evolving technology. The AAC's reasoning and various legal precedents favored the assessee's position. However, the Tribunal held that the expenditure was capital in nature, emphasizing the enduring benefits derived by the company from the technical know-how.

The Tribunal referred to the Madras High Court decision in Fenner Woodroffe & Co. Ltd. v. CTO Madras, highlighting the principles determining capital expenditure. It noted that the company's formation was based on the transferred technical know-how, leading to an enduring benefit. The Karnataka High Court's decision in Mysore Kirloskar Ltd. was distinguished due to the nature of the technical knowledge transfer.

Ultimately, the Tribunal ruled in favor of the Department, considering the payment for technical know-how as capital expenditure. It concluded that the company acquired an enduring asset through the knowledge imparted by the Managing Director, leading to a long-term benefit in the production of sports goods.

In conclusion, the Tribunal allowed the Department's appeals, upholding the classification of the payment for technical know-how as capital expenditure.