1974 (2) TMI 7 - HC - Income Tax

Whether drawings and patterns received by an assessee from a foreign company under a collaboration agreement can be said to be plant on which depreciation is allowable under section 32 of the Income-tax Act, 1961 - There is no reason to exclude know-how from the wide meaning of the term plant. Further having regard to the legislative intend to give a wide meaning to the word plant material record of know-how is clearly included within the meaning of plant in section 32 - it would appear that the Tribunal was right in taking the view that it did, namely, that drawings and patterns were plant within the meaning of section 32 and that, therefore, the assessee was entitled to depreciation in respect of those assets on the pro rata cost of their acquisition. Our answer to the question referred to us, is, therefore, in the affirmative and in favour of the assessee and against the revenue

Issues Involved:
1. Whether drawings and patterns received by an assessee from a foreign company under a collaboration agreement can be considered "plant" on which depreciation is allowable under section 32 of the Income-tax Act, 1961.

Detailed Analysis:

1. Background and Agreements:
The assessee, a public limited company engaged in manufacturing elevators, entered into two agreements with foreign collaborators-Alfred Wiseman & Co. Ltd. and Spencer (Melksham) Ltd. The agreements involved the supply of drawings, patterns, and technical know-how necessary for manufacturing specific machinery.

2. Nature of Expenditure:
The assessee claimed that the expenditure of Rs. 3,20,567 incurred under these agreements should be treated as revenue expenditure. This claim was rejected by the Income-tax Officer and the Appellate Assistant Commissioner, who held that the expenditure was of a capital nature and not allowable as revenue deduction. The assessee then claimed depreciation on the expenditure, arguing that the drawings and patterns should be treated as "plant" under section 32 of the Act.

3. Tribunal's Findings:
The Tribunal found that the expenditure was capital in nature and allowed the assessee to raise a new claim for depreciation. It concluded that drawings and patterns were "plant" within the meaning of section 32 and directed the Appellate Assistant Commissioner to ascertain the portion of expenditure attributable to these assets and allow depreciation accordingly.

4. Revenue's Arguments:
The revenue contended that:
- Drawings and patterns were not "books" and hence not "plant" under section 43(3) of the Act.
- Even under the ordinary meaning, drawings and patterns were not "plant" as they were merely material vehicles for technical know-how, an intangible asset.
- Technical know-how was not a depreciable asset.

5. Legal Provisions:
Section 32 allows depreciation on buildings, machinery, plant, or furniture owned by the assessee and used for business purposes. Section 43(3) includes "books" in the definition of "plant."

6. Court's Analysis:
- Books as Plant: The court examined whether drawings and patterns could be considered "books." It concluded that "books" must have both physical and functional characteristics and be useful for business purposes.
- Ordinary Meaning of Plant: The court referred to various judicial decisions, noting that "plant" includes any apparatus used by a businessman for carrying on his business, excluding stock-in-trade and premises. The functional test was emphasized, focusing on whether the asset is a tool of the trade.
- Drawings and Patterns as Plant: The court found that drawings and patterns formed the basis of the assessee's manufacturing business and had enduring utility, qualifying them as "plant."

7. Intangible Nature of Know-How:
The court addressed the revenue's argument that technical know-how is intangible and cannot be considered plant. It noted that know-how often takes a physical form, such as drawings and patterns, which can be bought, sold, or imparted. The court concluded that for the recipient, know-how and its material record form a single entity, making the drawings and patterns plant.

8. Depreciation and Obsolescence:
The court rejected the argument that plant must diminish in value solely by wear and tear. It recognized that depreciation also accounts for obsolescence, making know-how capable of depreciation.

Conclusion:
The court upheld the Tribunal's decision that drawings and patterns are "plant" under section 32 of the Income-tax Act, 1961, and the assessee is entitled to depreciation on these assets. The question referred to the court was answered in the affirmative, in favor of the assessee. The Commissioner was directed to pay the costs of the reference to the assessee.

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