2012 (6) TMI 626 - HC - Income Tax

Royalty payment - in the nature of revenue expenditure or capital expenditure - Held that - Considering the terms of the Technical Assistance Agreement entered between the assessee and MMB entitlement to use the know-how supplied by MMB for the manufacture of the products. The know-how and information received by the assessee directly or indirectly was to be kept strictly confidential and was entitled to use the trade mark Golden Eagle of MMB. The payment of royalty was, therefore, in the nature of expenditure incurred for carrying on business with available know-how rather than for accretion to the capital base or gain an advantage in the capital field of the assessee - in favour of assessee.

Summary

Issues:
1. Whether the royalty paid by the assessee to M/s. Mohan Meakins Breweries was in the nature of revenue expenditure?

Detailed Analysis:
The case involved the consideration of whether the royalty paid by the assessee to a brewery company constituted revenue expenditure. The assessee, engaged in the manufacture and sale of beer, had entered into a Technical Assistance Agreement with the brewery company for the use of their know-how in manufacturing products. The agreement outlined the payment of royalty by the assessee to the brewery company for the technical assistance and use of their brand name.

For the assessment years 1980-81 to 1982-83, the Assessing Officer initially considered the royalty payments as revenue expenditure eligible for deduction under section 37 of the Income Tax Act. However, for subsequent years, the Assessing Officer deemed the payments as capital expenditure, disallowing the deduction under section 37.

The Commissioner (Appeals) disagreed with the Assessing Officer's view, citing a Full Bench decision that supported the expenditure on royalty as revenue expenditure. The Income Tax Appellate Tribunal upheld this decision, leading to the Revenue appealing to the High Court.

In its judgment, the High Court analyzed the nature of expenditure based on established legal principles. Referring to previous court decisions, the High Court highlighted that expenditure for acquiring an asset or advantage for enduring benefit constitutes capital expenditure. Conversely, expenditure for running the business or producing profits qualifies as revenue expenditure. The court emphasized that the aim and object of the expenditure determine its character, irrespective of the source of payment.

Applying these principles to the case, the High Court concluded that the royalty payment for using the brewery company's know-how and brand name was revenue expenditure. The court noted that the payment facilitated the assessee's business operations without creating an enduring asset or advantage in the capital field. Additionally, the court pointed out that the Assessing Officer's initial assessment for the earlier years had also treated the royalty payments as revenue expenditure.

Ultimately, the High Court ruled in favor of the assessee, affirming that the royalty payments constituted revenue expenditure and were eligible for deduction under section 37 of the Income Tax Act. The appeals and reference were disposed of accordingly, with the question of law answered in favor of the assessee and against the Revenue.