2008 (2) TMI 456 - AT - Income Tax

Disallowed claim for deduction u/s 37(1) - Lump sum fees paid for technical know-how under the agreement - Nature of expenditure Capital or Revenue - depreciation on technical know-how - intangible assets - Disallowance PF contribution u/s 43B delayed payment - PF Deductions are deposited within the grace period. Such agreement acquired exclusive ownership in contractual proprietary rights and technical know-how supplied by the German company or merely received right to use the technical know-how with the mentioned principles/guidelines in mind HELD THAT - From analysis of the decisions referred to by both the parties following guidelines/principles can be deduced that (1) mere length of the period of the agreement is not of much consequence if the nature of the advice made available is such that it cannot be called a capital asset in case the agreement itself could be terminated by any party before the expiry of the term on any of the grounds stated in the agreement. Tata Engineering and Locomotive Co. 1979 (2) TMI 20 - BOMBAY HIGH COURT and Shirram Refrigeration Industries Ltd. 1980 (8) TMI 72 - DELHI HIGH COURT ; (2) where lump sum payment is made only for obtaining access to information which does not become its own the payment cannot be elevated to the status of payments of capital nature. (3) the terms of the agreement in each case are to be taken into consideration before deciding the question of the expenditure being revenue or capital in nature on the basis of the principles laid down by the various High Courts and the apex Court in their decisions; (4) if whole object of the agreement is only to obtain the benefit of technical know-how for running the business and the assessee does not absolutely acquire the technical know-how the expenditure incurred by the assessee for obtaining the same would be allowable as a revenue expenditure and cannot be treated as capital expenditure; (5) the term acquired / acquisition means and implies the acquiring of the entire title of the expropriated owner whatever the nature or extent of that title might be. The entire bundle of rights which were vested in the original holder would pass on acquisition to the acquirer leaving nothing in the former. Charanjit Lal vs. Union of India 1950 (12) TMI 17 - SUPREME COURT and in the case of Devidas Goopal Krishan vs. State of Punjab 1967 (4) TMI 131 - SUPREME COURT ; (6) in cl. 21 of the agreement where it is mentioned that the assessee is not obliged to return the documentation obtained from Kiekert after the termination of the contract would again by itself cannot result in the payment being treated as capital expenditure; and (7) the entries in the books of account are not determinative of deductibility of an item of expenditure for the purposes of computation of taxable income under the provisions of the Act. Kedarnath Jute Mfg. Co. Ltd. vs. CIT 1971 (8) TMI 10 - SUPREME COURT . Assessee must wholly or partly own and use the asset for the purpose of its business or profession still remained as it is. It means that for the assessee to be entitled to depreciation on intangible assets as provided in s. 32(1)(ii) from AY 1999-2000 all the other conditions are still required to be fulfilled for claiming the depreciation on tangible assets like ownership of the asset and user thereof etc. In view of clause Nos. 4.2 4.3 7, 9 12.1 19 21 22 and 23 of the agreement it is evident that the assessee company did not become the exclusive and absolute owner of the technical know-how received from the German company but it simply acquired a license or a limited right to use this technical know-how and hence the payment made by the assessee to the German company cannot be held to be on capital account but the payment is held to be on revenue account and hence deductible as revenue expenditure under s. 37(1) of the Act as laid down in the various cases. Hence for the reasons stated above we hold that the technical know-how fee paid by the assessee under the agreement with the German company is to be treated as revenue expenditure and so the assessee is entitled to claim deduction under s. 37(1) of the Act of the impugned expenditure in the AY s 2000-01 and 2001-02 under consideration before us. Accordingly the order of the CIT(A) passed in AY 2000-01 deleting the impugned addition is upheld and the order of CIT(A) passed in AY 2001-02 in sustaining the impugned addition is set aside. The ground of appeal taken by the Revenue is rejected and ground No. 1 of the appeal of the assessee is allowed. Disallowance of PF under the provision of s. 43B - Payment by cheque Within the grace period - We are of the opinion that in case the assessee has made the payment by cheque Within the grace period and the cheque has not been dishonored the assessee is entitled to claim deduction of this amount on account of the payment of PF through cheque under s. 43B of the Act. Hence for this limited purpose we restore this matter for verification to the file of AO and in case he finds the claim of the assessee to be correct he should allow the deduction to the assessee under s. 43B of the Act. With these observations this ground of appeal of the assessee stands allowed for statistical purposes and order of CIT(A) sustaining the impugned addition is set aside. In the result the appeal filed by the Revenue is dismissed and the appeal filed by the assessee stands partly allowed for statistical purposes in terms of the order passed hereinabove.

Summary

Issues Involved:
1. Whether the payment for technical know-how should be treated as capital expenditure or revenue expenditure.
2. Disallowance of payment on account of Provident Fund (PF) under Section 43B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Technical Know-How Payment:

Facts and Arguments:
- The assessee entered into a "license, know-how and assistance contract" with a German company, Kiekert AG, for acquiring technical know-how.
- The Assessing Officer (AO) treated the payment for technical know-how as capital expenditure, citing that the assessee acquired the technical know-how and used it for manufacturing, and allowed depreciation on it as an intangible asset.
- The CIT(A) for the assessment year (AY) 2000-01 treated the expenditure as revenue expenditure, while the CIT(A) for AY 2001-02 treated it as capital expenditure.
- The assessee contended that the payment was for the right to use the technical know-how and should be treated as revenue expenditure under Section 37(1) of the Income Tax Act.

Judgment:
- The Tribunal considered various clauses of the agreement between the assessee and Kiekert AG, which included restrictions on the use of technical know-how, non-transferability, and payment of royalties.
- The Tribunal concluded that the assessee did not acquire exclusive ownership of the technical know-how but only a limited right to use it.
- Therefore, the payment for technical know-how was held to be revenue expenditure and deductible under Section 37(1) of the Income Tax Act.
- The Tribunal upheld the CIT(A)'s order for AY 2000-01 and set aside the CIT(A)'s order for AY 2001-02, allowing the assessee's claim for deduction.

2. Disallowance of PF Payment under Section 43B:

Facts and Arguments:
- The AO disallowed the PF contributions for the months of May 2000 and March 2001, citing delayed payment.
- The CIT(A) allowed the deduction for the amount paid within the grace period but sustained the disallowance for the amount paid beyond the grace period.
- The assessee argued that the payment for March 2001 was made within the grace period by cheque, which was later cleared by the bank.

Judgment:
- The Tribunal referred to the Supreme Court and High Court decisions, which held that the date of tendering the cheque should be considered as the date of payment if the cheque is not dishonored.
- The Tribunal directed the AO to verify whether the payment was made by cheque within the grace period. If verified, the deduction should be allowed under Section 43B.
- The Tribunal set aside the CIT(A)'s order and allowed the assessee's appeal for statistical purposes.

Conclusion:
- The appeal filed by the Revenue was dismissed.
- The appeal filed by the assessee was partly allowed for statistical purposes, subject to verification by the AO regarding the PF payment.