1990 (2) TMI 146 - AT - Income Tax

Business Expenditure Capital Expenditure Component Parts Foreign Company Manufacture And Sale Orders Prejudicial To Interests Revenue Expenditure

Summary

Issues Involved:

1. Whether the payment of Rs. 1,13,611 by the assessee to M/s. Environmental Elements Corporation, USA, represented revenue expenditure or capital expenditure.
2. If the expenditure is treated as capital, whether depreciation and investment allowance should be granted.

Issue-wise Detailed Analysis:

1. Whether the payment of Rs. 1,13,611 by the assessee to M/s. Environmental Elements Corporation, USA, represented revenue expenditure or capital expenditure:

The assessee, a company engaged in the manufacture and sale of air pollution control equipment, had its income-tax assessment for the year 1982-83 completed by the Income-tax Officer, who allowed the claim that Rs. 1,13,611 paid to M/s. Environmental Elements Corporation, USA, as the second instalment of an initial engineering fee, was revenue expenditure. The Commissioner of Income-tax, however, considered this payment to be capital expenditure, initiated action under section 263 of the Income-tax Act, 1961, and directed the Income-tax Officer to treat the expenditure as capital expenditure.

The assessee argued that the payment was for obtaining technical knowhow under a "Technology Licensing Agreement --- Air Cleaning Systems --- Wet Scrubber Technology" and did not represent any advantage of an enduring nature to be regarded as capital expenditure. The technical knowhow was used with the existing infrastructure, and no new industrial undertaking was set up. The assessee's counsel cited various judgments, including Empire Jute Co. Ltd. v. CIT and Alembic Chemical Works Co. Ltd. v. CIT, to support the claim that the expenditure was revenue in nature.

The Tribunal examined the agreement and concluded that it was a technology licensing agreement, granting the license to use technical information for manufacturing air pollution control equipment. The technical information provided by EEC remained the property of EEC, and the appellant only had a license to use it. The Tribunal noted that the technical knowhow was used with the existing machinery and infrastructure, and no new capital asset or enduring advantage was obtained. Therefore, the payment of Rs. 1,13,611 was rightly allowed as revenue expenditure by the Income-tax Officer, and the Commissioner erred in treating it as capital expenditure.

2. If the expenditure is treated as capital, whether depreciation and investment allowance should be granted:

The Commissioner had directed the Income-tax Officer to verify whether any capital asset had been brought into existence by the expenditure and, if so, to grant proper depreciation and other allowances. However, since the Tribunal concluded that the expenditure was revenue in nature, it was unnecessary to examine the alternative contention regarding depreciation and investment allowance.

Conclusion:

The Tribunal allowed the appeal, holding that the payment of Rs. 1,13,611 was revenue expenditure and the Income-tax Officer had rightly allowed it. The order passed by the Commissioner under section 263 of the Act was canceled, and the assessment made by the Income-tax Officer was restored.