1973 (9) TMI 10 - HC - Income Tax

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that out of the sum of Rs. 21,232, the expenditure incurred in connection with technical know-how for manufacturing electric hoists was capital expenditure ? On the facts and in the circumstances of the case, the Tribunal was not right in holding that out of the sum of Rs. 22,233, the expenditure incurred in connection with technical know-how for manufacturing electric hoists was capital expenditure. We answer the question referred to us accordingly in favour of the assessee and against the revenue.

Issues Involved:
1. Determination of whether the expenditure incurred in connection with technical know-how for manufacturing electric hoists was capital expenditure or revenue expenditure.

Detailed Analysis:

Issue 1: Determination of Nature of Expenditure (Capital vs. Revenue)

Facts and Circumstances:
The relevant assessment year is 1963-64. The assessee, a private limited company, intended to manufacture electric hoists with a different design to increase lifting capacity. To acquire the necessary technical know-how, two directors and the production manager traveled to Berlin, Germany. The expenditure incurred for this trip amounted to Rs. 21,232. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal all deemed this expenditure as capital in nature, leading to the assessee's appeal.

Contentions by the Assessee:
1. The Tribunal erred in not applying the correct test to determine the nature of the expenditure, which should be based on the purpose for which it was incurred.
2. The expenditure was an integral part of the profit-earning assets and should be considered revenue expenditure.

Contentions by the Revenue:
The expenditure was incurred in connection with the proposed expansion of the assessee-company's activities and should be classified as capital expenditure.

Relevant Case Law and Principles:
1. Commissioner of Income-tax v. Ciba of India Ltd.: The Supreme Court held that technical knowledge provided by a parent company did not result in the acquisition of any asset or advantage of enduring nature by the assessee-company. The expenditure was deemed revenue in nature.
2. Commissioner of Income-tax v. Hindusthan General Electrical Corporation Ltd.: The Calcutta High Court held that payments made for acquiring rights to manufacture and sell products, without transferring any permanent rights or assets, were revenue expenditures.
3. Motor Sales, Lucknow v. Commissioner of Income-tax: The Allahabad High Court held that expenses for training personnel necessary for business operations were revenue expenditures.
4. Security Printers of India (P.) Ltd. v. Commissioner of Income-tax: The Allahabad High Court held that expenses incurred for studying new techniques before commencing manufacturing activities were revenue expenditures.

Judgment:
The High Court analyzed the nature of the expenditure and the purpose for which it was incurred. The court noted that the expenditure was for acquiring technical know-how and studying new designs to enhance the company's existing manufacturing process. The court emphasized that no permanent rights or benefits were acquired by the assessee-company, and the trip was primarily for exploring new designs and techniques to increase profits.

The court concluded that the Tribunal had erred in classifying the expenditure as capital in nature. The expenses were incurred to get an idea of new designs and manufacturing processes, which did not result in the acquisition of any capital asset.

Conclusion:
The High Court held that the Tribunal was not justified in disallowing the proportionate claim of the assessee-company for the expenses incurred in connection with the trip abroad. The expenditure was deemed to be revenue in nature. The question referred to the court was answered in favor of the assessee and against the revenue. The Commissioner of Income-tax was directed to pay the costs of the applicant-assessee.

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