2010 (10) TMI 25 - HC - Income Tax

Revenue Expenditure versus capital expenditure - payment for technical know how fees for supply of technology - Assessee treated the payment as revenue expenditure - AO treated the same as capital expenditure - Held that - Tribunal was justified in its opinion that the payment made in question was allowable as revenue expenditure and not as capital expenditure allowable for deprecation under Section 32 of the Act.

Summary

Issues Involved:
1. Whether the payment of Rs. 63,46,000 made by the assessee for acquiring technical know-how is allowable as revenue expenditure.
2. Whether the expenditure incurred by the assessee for acquisition of technical know-how was a revenue expenditure or a capital expenditure eligible for depreciation under Section 32 of the Act.

Issue-wise Detailed Analysis:

1. Whether the payment of Rs. 63,46,000 made by the assessee for acquiring technical know-how is allowable as revenue expenditure:

The respondent assessee, engaged in manufacturing and sale of auto electrical products, made a payment of Rs. 63,46,000 to M/s Denso Corporation, Japan for supply of technology and improvement of existing products. The assessee claimed this expense as revenue in nature, allowable as business expenditure for the assessment year 2001-02. The Assessing Officer treated this expenditure as capital in nature, allowing only depreciation under Section 32 of the Act. The Commissioner of Income Tax (Appeal) upheld this view, treating the expenditure as capital expenditure eligible for depreciation. However, the ITAT reversed this decision, holding that the payment was for improving the quality of products and not for acquiring any asset of enduring nature. The ITAT concluded that the expenditure was revenue in nature, relying on the Bombay High Court judgment in Gannon Norton Metal Diamond Dies Ltd. Vs. CIT and Supreme Court judgment in Empire Jute Co. Ltd. The High Court upheld the ITAT's decision, agreeing that the payment was for improving the existing design and not for acquiring a new capital asset.

2. Whether the expenditure incurred by the assessee for acquisition of technical know-how was a revenue expenditure or a capital expenditure eligible for depreciation under Section 32 of the Act:

The revenue argued that the payment should be treated as falling under Section 32 of the Act, thus liable to depreciation, based on the amended Section 32(1)(ii) which includes know-how, patents, copyrights, etc. as intangible assets eligible for depreciation. The High Court rejected this argument, stating that the nature of expenditure must first be determined as either revenue or capital. The Tribunal had already determined that the expenditure was revenue in nature, as it was for modifying the existing design to suit the requirements of the assessee's clients. The High Court emphasized that depreciation under Section 32 would only apply if the expenditure was capital in nature. The Court also noted that the judgments cited by the revenue pertained to cases where the expenditure was already accepted as capital in nature, and the dispute was about the applicability of depreciation. The High Court concluded that the payment made by the assessee was for technical services to improve existing products, and thus, it was revenue expenditure. Consequently, the High Court dismissed the revenue's appeals, affirming that the expenditure was allowable as revenue expenditure and not as capital expenditure eligible for depreciation under Section 32 of the Act.