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TMI Blog1996 (2) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment would have been fully paid for by the payment made for the year 1976-77 and is not the above finding (or surmises) based on no material and perverse ? " The assessee is a private limited company having the main objects to manufacture, otherwise deal in formaldehyde, polyester/urea/phenol resin, pentaorythritol, hexemine and their derivatives including other organic and synthetic chemicals. The assessee entered into an agreement with Arborites Pvt. Ltd. company, which was functioning adjacent to the premises which carried on business of manufacture of urea formaldehyde resin. The agreement was entered into with the said company for the supply of technical know-how. The assessee entered into a collaboration agreement on May 23, 1975, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 976-77, which is the first assessment year during which the aforesaid arrangement has been entered into, the assessee claimed deduction of Rs. 34,779 paid by way of royalty under the agreement as an item of revenue expenditure. The Income-tax Officer disallowed the said claim holding that the expenditure was of a capital nature. On appeal by the assessee, the Appellate Assistant Commissioner allowed the claim for deduction holding that the royalty paid constitutes revenue expenditure. On appeal by the Department, the Tribunal held that part of the payment of royalty under the agreement attributable to the initial manufacture would be capital in nature and the rest of the payments would be revenue in nature. Accordingly, the Tribunal held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the assessee is entitled to depreciation and development rebate as part of the cost of its machinery and plant. " With reference to the aforesaid question posed for consideration, this court proceeded to consider the legal principles applicable to decide the question as to whether a particular expenditure is of capital nature or of revenue nature. In that context, this court referred to the decision of the Supreme Court in M. K. Brothers Pvt. Ltd. v. CIT [1972] 86 ITR 38. In that decision, the Supreme Court referred to its earlier decision in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) and observed at page 43 of the report as follows : " As observed by this court in the case of Assam Bengal Cement Co. Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. " The observations of the Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 to the effect that if disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure are also relevant in this context. This court had also occasion to consider the nature of the royalty paid on acquisition of the sole selling agency right of McDowell and Co. by the assessee at the rate of Re. 1 per case of liquor sold. In that case, this court considering the nature of the payment held that the expenses incurred by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd from the above observations of this court any consideration and finding as to whether the expenditure incurred in the case on hand would be of capital nature or of revenue nature by applying the principles laid down by the Supreme Court and referred to in the said decision. Regarding the findings entered by the Tribunal as to the nature of royalty payment for the subsequent years, though the first question referred for the decision of this court took in the said aspect also, this court left open the question as to what will be the nature of such expenditure in future. This court further observed that the second part of the question relating to royalty does not arise for decision in the present assessment proceedings and, therefore, they ..... X X X X Extracts X X X X X X X X Extracts X X X X
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