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TMI Blog1986 (3) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... 976-77, should be attributed to such capital expenditure and the royalty payable for the remaining four years should be considered as revenue payment ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in respect of Rs. 34,779 allocated towards capital, the same would go to constitute the cost of plant and, therefore, appropriate depreciation and development rebate should be allowed thereof ? " The assessee is a company incorporated on May 18, 1974, with the object of manufacturing and selling organic and synthetic chemicals. The company had its buildings constructed and machineries installed and it started producing formalin from February 24, 1975 onwards. The assessee entered into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 34,779 paid during the accounting period relevant to the assessment year 1976-77 as revenue expenditure. The Income-tax Officer disallowed the claim for deduction holding that the expenditure was of a capital nature. In appeal, at the instance of the assessee, the Appellate Assistant Commissioner allowed the claim for deduction in the view that he took 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 that the amount of royalty paid in the first year will be treated as capital ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant accounting period concerned was a revenue expenditure was not accepted by the Supreme Court. The Supreme Court observed at page 43: As observed by this court in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34, 45, if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e royalty paid on acquisition of the sole selling agency right of McDowell Co. by the assessee at the rate of Re. 1 per case of liquor sold. This court considering the nature of the payment held that the expenses incurred by way of royalty paid during the relevant accounting period was of a capital nature and the assessee is not entitled to deduction of the same as an item of revenue expenditure. In a recent decision of the Supreme Court in Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86, the expenditure incurred for acquisition of technical know-how by way of designs, drawings, charts, plans and other literature was held to be of capital nature which would add to the cost of the plant and machinery and the assessee was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata and other literature falls within the definition of 'plant' and is, therefore, depreciable asset. Counsel invited our attention to the decision in CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672 (Guj), where the Gujarat High Court has, after exhaustively reviewing the case law on the topic, held that drawings and patterns which constitute know-how and are fundamental to the assessee's manufacturing business are 'plant'. We agree and approve the said view." In view of this recent pronouncement of the Supreme Court, it is unnecessary for us to refer to the various decisions of different High Courts cited at the Bar by counsel on both sides. As earlier observed, the question relates to the claim for deduction of the royalty paid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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