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TMI Blog2011 (11) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... 28,07,950/- towards royalty which is a capital expenditure has been treated as revenue expenditure and further, the expenditure incurred by the President and his wife has been shown as expenses towards business of the company and depreciation claimed is excessive as two machinery have been discarded and therefore, notice under Section 143(2) of the Act was issued to the assessee. The assessee appeared before the assessing officer and contended that the amount of Rs. 28,07,950/- has been paid as licence fee as per the agreement which has been entered into with M/s. Luwa AG Switzerland at 5% on sales net of cost of standard, as per the approval given by the Reserve Bank of India and since the said amount has been paid based on the sales made and is recurring in nature, the entire expenditure is revenue expenditure. The assessee relied upon certain decisions including the decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC). However, the assessing officer held that in view of the agreement entered into with M/s. Luwa, Switzerland, the payment of royalty would amount to capital expenditure as the company use the know-how and technology granted under the licence in the manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was for the purpose of discharge of social-cum-business obligation and therefore, held that, the assessee is entitled to claim deduction. Further, in respect of disallowance of depreciation claimed by the assessee on the assets discarded due to obsolescence, the ITAT allowed the claim of the assessee. Being aggrieved by the same, the Revenue has preferred this appeal. 3. The appeal has been admitted on 30-8-2007 to consider the following substantial questions of law which arise for determination in this appeal. (1) Whether the Tribunal was right in reversing the finding of the Assessing Officer that the royalty payment of Rs. 28,07,950/- paid to M/s. Luwa Switzerland in respect of obtaining new technology and know-how and rights and services should be treated as the capital expenditure as held by the Assessing Officer? (2) Whether the Tribunal was correct in holding that the payment of Rs. 1,43,699/- towards foreign tour expenses of wife of the president of the assessee is an allowable deduction for business purpose? (3) Whether the Tribunal was correct in allowing depreciation on the assets as claimed by the assessee and not worked out by the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion and, as pointed out by Lord Radeliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In support of his contention, he has relied upon the decision of the Hon'ble Supreme Court in CIT v. I.A.E.C. (Pumps) Ltd. [1998] 232 ITR 316 wherein, having regard the agreement granting assessee exclusive licence to use patents and designs for 10 years with an option to extent or renew the agreement, payments made by the assessee would amount to revenue expenditure and not capital expenditure. He further submitted that it is well settled that points to be kept in mind while considering the question as to whether expenditure incurred is revenue expenditure or capital expenditure has been laid down by the Hon'ble Supreme Court in Empire Jute Co. Ltd. case (supra) referred to by the learned counsel appearing for the appellant. The ITAT being the final authority on the question of law, has decided that the expenditure was revenue in nature and therefore, the order of the ITAT is justified. 7. We have given careful consideration to the contentions of learned counsel appearing for the parties and scrutinized the material on record in the light of the decisions relied upon by the learned counsel appearing for the parties. Re: Substantial question of law No. (1) 8. It is clear that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and the expenditure incurred in respect of the wife would not be granted and therefore, deduction to the extent of 50% of the expenditure was allowed and the same has been confirmed by the appellate authority. The ITAT held that the material on record would show that the President had gone abroad with his wife to attend budget conference and the same cannot be a social obligation and purpose of the social obligation being wife of the President and it is not the case of the Revenue that wife of the President did not accompany the President and that they had travelled abroad for budget conference i.e., for the purpose of business of the assessee and further, the finding of the ITAT is supported by the decision of the Kerala High Court in Apollo Tyres Ltd. case (supra) cited above. The learned counsel appearing for the appellant submitted that appellate authority had confirmed the order of the assessing officer as it was shown that the wife had not accompanied the President of the company to discharge social obligation. In support of his contention, he has relied upon the decision of this Court in Mac Explotec (P.) Ltd. v. CIT [2006] 286 ITR 378/155 Taxman 247. The decision in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed only in respect of machinery that are used in the manufacture of the product and when certain machinery out of the block assets have been discarded, the question of claiming depreciation for the machinery would not arise merely on the basis that depreciation was claimed on the block assets, the very set of expenditure is due to wear and tear of the machinery in the manufacture of the product of the assessee and when the machinery had been discarded, the question of depreciation in respect of those machinery also merely because depreciation is claimed on the block assets may not arise and therefore, the appellate authority has rightly confirmed the order of the assessing officer that depreciation claimed has to be proportionately reduced in respect of the machineries discarded in a sum of Rs. 22,442/- and the ITAT was not justified in setting aside the said finding and accordingly, we answer the said substantial question of law in favour of the revenue and against the assessee. 12. In view of the above, we pass the following: ORDER The appeal is allowed in part. The finding of the ITAT treating the payment of licence fee of Rs. 28,07,950/- as revenue expenditure and disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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