TMI Blog1985 (3) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... alary paid to the foreign technicians, the cost of air passage, hotel accommodation, etc., for them. Besides, the Income-tax Officer found that the assessee had employed a portion of the money borrowed by it for investment in the shares of other companies and concluded that the interest paid by it on such borrowals should be allocated between the business income and the income by way of dividends and worked out the interest allocable to the income by way of dividend as 52.90% of the total interest paid and computed the interest on borrowals unutilised for the assessment year 1968-69 at Rs. 5,17,566 after negativing the contention of the assessee that the investment in shares was only an extension of the business activity of the assessee and, therefore, the entire interest should be deducted in computing the business income. While granting relief under section 80M of the Income-tax Act, 1961 (hereinafter referred to as " the Act "), the Income-tax Officer computed the same at 60% of the net dividend, that is to say, Rs. 18,52,198 as against the gross dividend of Rs. 23,69,664. On appeal by the assessee, the assessment was confirmed except that it was found that for the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend income? " The learned junior standing counsel, Mr. C. V. Rajan, submitted, referring to the terms of the agreement entered into between the assessee and the foreign company, that the Tribunal had arbitrarily apportioned the expenditure and fixed that 20% of the expenditure incurred be taken as revenue expenditure and the rest as capital expenditure without any basis. On the other hand, the learned counsel for the assessee pointed out that predominantly the payments made to the foreign company were in respect of the services rendered relating to the setting up of the plant and machinery for the garment factory and would be revenue expenditure and, in view of the terms of the agreement, the Tribunal cannot, be stated to have committed any error in estimating and fixing a reasonable portion of that expenditure, viz., 20% as revenue expenditure. We have been taken through the terms of the agreement entered into between the assessee and the foreign company. A reading of the terms of the agreement shows that provision has been made therein for setting up the plant and machinery for the garment factory and also for rendering service and advice in several matters. The payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t payments partaking the character of capital expenditure and revenue expenditure have been therein rolled up together. It is not the case of the Revenue that even in such a case the assessee will not be entitled to an apportionment of the expenditure for the purposes of ascertaining the income. The Tribunal after adverting to the terms of the agreement has estimated that 20% of the expenditure incurred should be regarded as revenue expenditure. This estimate, in our view, appears to be just and reasonable. It has also not been shown how the estimate of 20% of the expenditure as revenue expenditure is erroneous and we are not, therefore, inclined to disturb this estimate arrived at by the Tribunal. On the facts and in the circumstances of this case and having regard to the terms of the agreement between the assessee and the foreign company referred to earlier, we are of the view that the Tribunal was justified in estimating and concluding that 20 percent. of the expenditure incurred should be taken as revenue and the rest as capital expenditure. We, therefore, answer the first question referred to us in the affirmative and against the Revenue. That takes us on to a consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Act, 1922, and the assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. CIT v. Simco Meters Ltd. [1978] 111 ITR 113 (Mad), laid down that amounts spent by way of payment to foreign collaborators for technical know-how as expenditure necessary to bring such assets into existence and to put them in working condition would be eligible for depreciation and that those items which are referable or relatable to the erection of the machinery or bringing into existence any of the assets of the company or for putting them in working condition alone can be capitalised. In CIT v. Festo Elgi Pvt. Ltd. [1981] 129 ITR 499 (Had), technical know-how supplied to the assessee by a foreign collaborator in the form of blueprints, instructions, technical manuals, etc., have been held to constitute the tools for the carrying on of the business of the assessee and have an enduring benefit and form the cost of the capital assets with which the assessee carried on its business and hence they constitute " plant " for the purpose of depreciation and, therefore, depreciation and development rebate should be granted on the amount paid to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... answer the second question referred to us in the affirmative and against the Revenue. The answer to the last question depends upon the interpretation of section 80M of the Act. The Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 (SC), has approved of the view taken by this court in Madras Auto Service v. ITO [1975] 101 ITR 589 (Mad) and held that the deduction permissible under section 80M of the Act is to be calculated with reference to the full amount of dividends received from domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act. In so holding, the Supreme Court also referred to the amendments made several times in section 80M of the Act and the omission to amend the language employed in section 80M, sub-section (1), to override the interpretation put thereon by the courts, which was taken as the legislative recognition of the interpretation by courts. In that view, the Supreme Court held that the full amount of dividend derived should be taken into account without deduction of interest paid on borrowings for acquiring the shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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