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TMI Blog2000 (6) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had spent this amount for the development of tools to manufacture the same components. It was also submitted that it was a continuous process for alteration in the tools for achieving the maximum output by reducing mechanical processes and for saving in material consumption. The Assessing Officer noted that expenditure incurred on designs and development of tools was a part and parcel of the plant and machinery being used to manufacture the components. Expenditure incurred on designing of these tools would give the assessee benefit of enduring nature and, therefore, the same was treated as capital expenditure. However, the Assessing Officer allowed depreciation of Rs. 1,37,000 thereon at the rate of 33.3 per cent which reduced the impugned addition to Rs. 4,11,000 (5,48,000 - 1,37,000) for the assessment year under appeal. 3. Aggrieved, the assessee took the matter in appeal before the CIT(A). It was submitted before the CIT(A) that as a result of consultation and designs of various tools and processes, the assessee has saved a number of manufacturing processes resulting in increase of manufacturing and sale and profitability. The assessee had cited specific items like s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in enduring benefit to the assessee, the expenditure would fall in the category of capital. He also relied on the judgment in Hinton (Inspector of Taxes) v. Maden & Ireland Ltd. [1960] 39 ITR 357 (HL) where expenditure on the replacement of knives etc. was considered to be capital expenditure. Further he relied on the decisions in CIT v. Noroth Oil Mill Co. Ltd. [1983] 140 ITR 173 3 (Ker.) and CIT v. Shri Digvijay Cement Co. Ltd. [1986] 159 ITR 253 4 (Guj.) and the decision of the Calcutta High Court in CIT v. Hindusthan Pilkington Glass Works Ltd. [1994] 73 Taxman 631 where expenditure incurred on fabrication of sheet glass furnace was held to be a capital expenditure. He also relied on the judgment in Assam Bengal Cement Co. Ltd v. CIT [1955] 27 ITR 34 (SC). He also made an alternate submission that if the expenditure has been incurred through outside agency, the expenditure is allowable only if the same is incurred exclusively for the assessee. For this proposition, he relied on two judgments in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC) and Indian Telephone Industries Ltd v. CIT [1979] 117 ITR 682 (Kar.). In the light of these facts, he pleaded that the order of the CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim deduction under section 35, there was no need on its part to claim the same as revenue expenditure. In that case, the assessee should have capitalised the expenditure and claimed 1/3rd of deduction as provided under section 35AB. 7. The ld. Counsel for the assessee made a request that through oversight, he could not reply to the points made by the ld. D.R. by relying on two decisions of the Supreme Court in the cases in Ciba of India Ltd. and Indian Telephone Industries Ltd. He submitted that these judgments did not apply to the provisions of section 35AB as these provisions had not come into being at the relevant time. He also submitted that whether the assessee has acquired enduring benefit by way of incurring such expenditure or not, has been answered by the Hon'ble Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468. He submitted that page number of the ITR will be given later on. He also submitted that the Hon'ble Supreme Court has in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 has held that additional plea could be raised before the appellate authority at any point of time if it related to the question of law a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be revenue expenditure by the ITAT. While deciding the appeal in favour of the assessee, the ITAT has held that by incurring such expenditure, the assessee had only carried out modification and improvements in the existing designs. This case falls in the same category as that of the assessee. Here also, the assessee has carried out improvements in the items/components already manufactured by it. The assessee has neither set up a new unit nor incurred such expenditure for manufacturing items not in the line of business of the assessee. While deciding this case, the ITAT Jaipur Bench had also relied on the judgment of the AP High Court in the case of Praga Tools Ltd. where the expenditure incur-red for obtaining consultancy to improve quality of products was held to be revenue expenditure and the High Court also held that it was not for acquiring an asset of an enduring nature. 9. The Revenue's case is that by incurring such expenditure the assessee had obtained enduring benefit. Now the question that requires to be addressed is what is the meaning of 'acquiring a benefit of enduring nature'. Their Lordships of the House of Lords in the case of Hinton (Inspector of Taxes) has obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure. While deciding this case, the Hon'ble Apex Court has held that expenditure is deemed to be capital when it is made for the initiation of a business, for extension of a business or for a substantial replacement of equipment. Expenditure may be treated as attributable to capital when it is made not only once and for all but may be due to bringing into existence an asset or an advantage for the enduring benefit of a trade. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in capital asset, then that puts the business on another footing. Thus in the case before the Supreme Court, the assessee by incurring expenditure on construction of new building on the premises taken on lease, the benefit was to run for 39 years but still it was held to be revenue expenditure because by incurring such expenditure, the assessee had not acquired any capital asset. Thus in the light of these facts, the deciding factor as to whether the assessee has derived benefit of enduring nature or not is not number of years for which the benefit i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter considering the various judgments, the Bombay High Court recorded the following findings at pages 1028 to 1029:-- "We are unable to accept that this proposition applies the assessee's case. This is so, because we are unable to read the assessee's agreement with the German company as an agreement the predominant purpose of which was to render mere documentation service. As pointed in Kirloskar Pneumatic's case [1982] 136 ITR 746 (Bom.), it is not possible to scan a contract in bits and pieces to determine its nature, nor by referring to a particular clause. As we read the agreement of the assessee with the German company, the predominant object of the agreement was to render technical know-how to the assessee. In relation to the main purpose, one of the incidental objects was to transfer the designs, data sheets and such other technical documents. We are unable to accept the argument of Mr. Jetley that the agreement in question, when read in its entirety, should be held to be an agreement mainly for the purpose of supply of documents. When the true purpose of the agreement is discovered there is no difficulty in applying the ratio of the judgments of this Court in Telco's case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in improving the quality of the existing product already manufactured by the assessee. (ii) In the case of Ashok Leyland Ltd. the assessee had paid compensation to managing agents for dropping assembly of motor car as the assessee had started new business of manufacturing of trucks. Owing to this, continuance of managing agency became surplus and, therefore, the assessee paid compensation for termination of the services of the managing agents. In the light of these facts, the Supreme Court held that compensation paid for termination of the services of the managing agents was with a view to save business expenditure in the accounting period as well as a few subsequent years, it was not made for acquiring any enduring benefit or income yielding asset. Therefore, the expenditure was of a revenue nature and was an allowable deduction in computing the profits of the assessee-company. The facts of that case are clearly distinguishable from the present case. The assessee had not paid any compensation and, therefore, this does not support the case of the Revenue. (iii) In the case of Hinton (Inspector of Taxes), expenditure incurred on the replacement of knives was held to be capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex Court held that consideration was paid with a view to prevent trading competition in the neighbouring quarries so that the assessee could enjoy monopoly rights. This was held to be capital expenditure because the assessee derived benefit of enduring nature. The nature of expenditure incurred in this case is different and, therefore, the case is distinguishable from the facts of the present case. (viii) In the case of Ciba of India Ltd., the facts before the Hon'ble Supreme Court were that the assessee had entered into an agreement with foreign company for specified period for use of processes, scientific data, patents and trade marks for which the assessee agreed to contribute to a foreign company of a percentage of sale price of products towards technical services, research work, cost of material used in research and royalties. It may be noted that in this case, the foreign company granted to the assessee full and sole right and licence under the patent listed in the agreement to make, use, exercise and vend the inventions specified therein in India and also a licence to use certain specified trade marks in the territory subject to any existing licence which third parties held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the Revenue as the facts of the present case are clearly distinguishable from the facts of those cases. 12. Now the last issue, that needs to be considered is whether the expenditure could be allowed under section 35AB. It was the contention of the ld. Counsel for the assessee that there being specific section in the Act, expenditure incurred should be allowed under section 35AB. For this purpose, it would be relevant to refer to the memorandum explaining the purpose of provisions of section 35AB inserted by the Finance Bill, 1985 which is as under:-- "44. Deduction in respect of expenditure on know-how. It is proposed to insert a new section 35AB in the Income-tax Act to provide that any lump sum consideration paid by a taxpayer for acquiring any know-how for use for the purposes of his business will be allowed as deduction by spreading it equally over six years, namely, the year in which the lump sum consideration is paid and the five immediately succeeding years. Where the know-how is developed in a laboratory, university or institution referred to in sub-section (2B) of section 32A, the consideration shall be spread equally over three years." Now in this case, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o that consideration paid for acquiring technical know-how which would otherwise be disallowable as being on capital account. In the case under consideration, there is no material on record to show that the expenditure incurred by the assessee was for acquiring the technical know-how. It was incurred for obtaining and updating the mere use of the technical know-how and information, which was already available with the assessee. Therefore, the expenditure incurred by the assessee would not fall in the category of capital expenditure. The provisions of section 35AB would be applicable only if the expenditure is held to be of capital nature. Therefore, we do not agree with the ld. Counsel for the assessee that deduction under section 35AB is to be allowed in this case. 13. In the light of detailed discussion in the preceding paragraphs, we hold that expenditure incurred by the assessee by way of consultancy charges and research and development expenses for modification of the existing automobile components does not relate to capital field. By incurring such expenditure, the assessee has only effected economy and efficiency in manufacturing the existing items. The expenditure does not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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