1988 (2) TMI 137 - AT - Income Tax

Issues Involved:
1. Disallowance of license fee as capital expenditure.
2. Disallowance of payments made to foreign collaborators for Engineering Services.
3. Disallowance of royalty payments to foreign collaborators.
4. Mistake in figures regarding preliminary expenses.
5. Calculation of deduction under section 80MM.
6. Depreciation on the cost of documents.
7. Reliance on ITAT orders under judicial propriety.

Detailed Analysis:

1. Disallowance of License Fee as Capital Expenditure:
The primary issue was whether the license fee of Rs. 8,20,347 paid to foreign collaborators should be treated as capital expenditure or revenue expenditure. The Standing Counsel argued that the ITAT had previously held the license fee as capital expenditure for the assessment years 1974-75, 1975-76, and 1976-77. The AR did not dispute these facts but argued that the license fee should be considered a revenue expense. The Tribunal, following its earlier decisions, reversed the CIT (Appeals) order and restored the disallowance of Rs. 8,20,347 as capital expenditure.

However, the Judicial Member disagreed, arguing that the CIT (A) had allowed the license fee as revenue expenditure based on ITAT's order in earlier appeals. He contended that the payment was for services received and not for acquiring a capital asset. The Third Member, considering the clauses in the agreement and relevant case laws, concluded that the license fee was for the right to use technical know-how for a limited period and thus should be treated as revenue expenditure. Consequently, the sum of Rs. 8,20,347 was allowed as revenue expenditure.

2. Disallowance of Payments Made to Foreign Collaborators for Engineering Services:
The CIT (Appeals) had deleted the disallowances of Rs. 92,42,836 for 1978-79 and Rs. 50,40,012 for 1979-80. The Standing Counsel argued that similar disallowances had been confirmed by ITAT in earlier years. However, the Tribunal found no evidence that such disallowances were made in the past and noted that the Department had allowed these expenses as revenue expenses in earlier years. Therefore, the Tribunal concluded that these payments were revenue in nature and rejected the Department's contention for both years.

3. Disallowance of Royalty Payments to Foreign Collaborators:
The CIT (Appeals) had deleted the disallowance of royalty payments amounting to Rs. 5,61,431 for 1978-79 and Rs. 5,36,349 for 1979-80. The Standing Counsel argued that the ITAT had misunderstood the facts in earlier years, relying on incorrect precedents. The AR cited various case laws supporting the treatment of royalty as a revenue expense. The Tribunal, following the latest case laws and the decision of the Patna High Court, held that royalty payments were revenue expenses and rejected the Department's contention for both years.

4. Mistake in Figures Regarding Preliminary Expenses:
The Department contended that the CIT (Appeals) had incorrectly mentioned the disallowed amount under preliminary expenses. The Tribunal directed the CIT (Appeals) to rectify the mistake if it had not been done already.

5. Calculation of Deduction Under Section 80MM:
The Department argued against the CIT (Appeals) accepting the assessee's claim that deductions under section 80MM should be calculated with reference to gross receipts. The Tribunal, following its earlier orders, rejected the Department's contention.

6. Depreciation on the Cost of Documents:
The Department contended that depreciation should not be allowed on Rs. 30,06,196 representing the cost of documents. The Tribunal, following its earlier orders, rejected this contention.

7. Reliance on ITAT Orders Under Judicial Propriety:
The Department argued that the CIT (Appeals) should not have relied on ITAT orders from earlier years as they were sub judice before the High Court. The Tribunal held that as long as the ITAT orders stood and were not overruled, they should be followed in subsequent years, maintaining judicial propriety.

Conclusion:
The appeal of the Department for the assessment year 1978-79 was allowed in part, while for the assessment year 1979-80, it was rejected. The Tribunal's decision was based on a thorough analysis of facts, previous rulings, and relevant case laws, ensuring that judicial propriety and consistency were maintained in their judgments.

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