TMI Blog1985 (1) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to HAL as it had enough facilities to undertake the preliminary work of the project. It was agreed that HAL should ultimately transfer that work to BEML after its incorporation. With that understanding, HAL did some work by starting an Earth Mover Division. With effect from January 1, 1965, the Rail Coach Division of HAL, as a going concern, was transferred to BEML. BEML took over the developmental expenditure amounting to Rs. 3,21,485 from HAL and paid an equivalent amount as consideration therefor. It represented the unabsorbed expenditure incurred by HAL earlier to April 1, 1962, towards design and development of various models of integral coaches which were taken over by BEML. The first year of account of BEML ended on March 31, 1965, and 1965-66 was the first year of assessment to income-tax. In the first return of income filed by BEML, the assessee claimed deduction of Rs. 78,400 on amortization basis, treating the sum of Rs. 3,21,485 as deferred revenue expenditure. To put it in laconic details, out of the said sum of Rs. 3,21,485, in addition to what the assessee had itself spent, the assessee claimed a deduction of Rs. 78,400 for the assessment year 1965-66. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-company during the year ended March 31, 1965. It was urged before him that the transfer of the rail coach division by the HAL to the assessee was as a going concern and on the date of the transfer, the HAL had in its rail coach division embarked upon the integral coach project and the diesel car project and had spent the amount of Rs. 3,21,485 which had been debited to the corresponding development Suspense account. It was urged that the assessee had got the benefit of this expenditure on taking over the rail coach division and, therefore, the assessee had claimed the amount on amortisation basis. 8. ...... It was urged that in respect of the rail coach division, the material and labour utilised towards the design and development of the various models of integral coaches had resulted in revenue expenditure even when the HAL was dealing with this division. All that the assessee had done was that it amortised the revenue expenditure over the number of particular models expected to be manufactured in each year and debited the same to the profit and loss account as and when such coaches were sold. It was pointed out that the amortisation basis had been adopted by the HAL in its ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e project was handed over to BEML with all its assets and liabilities with effect from January 1, 1965. Of course, it was not a going concern like that of the Rail Coach Division. As stated earlier, the assessee closed its accounts for the first time on March 31, 1965. A sum of Rs. 18,53,023 was incurred by HAL in connection with the preliminary work on the project of Earth Mover Division. In the first return, the assessee treated the said sum of Rs. 18,53,023 being the expenditure initially incurred by HAL and paid for by the assessee as deferred revenue expenditure for the assessment year 1965-66. Out of the said sum, the assessee claimed a deduction of Rs. 3,59,510 on amortisation basis. Before the completion of the assessment, the assessee filed a revised return claiming the entire sum of Rs. 18,53,023 as a deduction. The ITO did not consider the latter claim. He held that the expenditure incurred by HAL before the date of incorporation of BEML cannot be allowed as an admissible deduction in computing the income. He also disallowed the claim of Rs. 3,59,510 made on amortisation basis. The assessee appealed to the AAC. The AAC rejected the assessee's claim of Rs. 3,59,510. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . During the course of the hearing of the assessee's appeal for the assessment year 1965-66, the ITO made plea to the AAC requesting him to enhance the assessment by disallowing the technical assistance fee of Rs. 4,79,750 which was wrongly allowed as a deduction by him. Bat the AAC in disposing of the appeal for the assessment year 1967-68 held that the payment of technical assistance fee was revenue expenditure. Hence, the AAC did not find it necessary to entertain the ITO's plea for enhancement for the assessment year 1965-66. The Tribunal in the second appeal relating to the assessment year 1967-68 held that the technical assistance fee was a capital expenditure. Accordingly, the Tribunal directed the AAC to entertain the ITO's plea for enhancement for the assessment year 1965-66, and decide the issue on the basis of the Tribunal's decision for the assessment year 1967-68. On the above facts, the Tribunal has referred the following question : Question No. (iii) : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in assuming jurisdiction on the question of refusal of the Appellate Assistant Commissioner to enhance the assessment and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g from Hindustan Aircraft Limited to Government. The balance of the amount, if any, will be adjusted against the future capital requirements of that company. The amount payable by Bharat Earth Movers Limited to the President will be adjusted against the sale of additional shares to be issued by that company for the purpose in favour of the President. " Before the said letter was received, the board of directors of HAL and the board of directors of BEML in their respective meetings held on June 11, 1964, decided to accept the decision of the Government of India and the procedure to be followed to give formal effect to the transfer of the Rail Coach Division. Accordingly, BEML took over the Rail Coach Division as a going concern after making the required payment, out of which a sum of Rs. 3,21,485 represented unabsorbed revenue expenditure incurred by HAL. The HAL did not claim it as business expenditure in the earlier years, and indeed HAL could not have claimed it, since it has been undisputedly following the amortisation principle of accountancy. But that, in our opinion, is no bar for BEML to claim it in toto in the assessment year in question as business expenditure, since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to M/s. WABCO collaborators and it was an expenditure of a capital nature in respect of which depreciation could be allowed to the assessee. In reaching this conclusion, the Tribunal has followed the decision of this court in Mysore Kirloskar v. CIT [1968] 67 ITR 23. The Tribunal observed thus: " A major portion of the development expenditure pertains to the technical assistance fee paid by HAL to the collaborators. That we have already held to be expenditure of a capital nature on which depreciation has to be allowed to a limited extent following the Gujarat High Court ruling in Elecon Engineering Co. on documents, data, design, etc., treating them as plant. In so far as the assessee has received them from HAL and paid for them, it shall be entitled to depreciation. For intangible assets taken over and paid for, the assessee is not entitled to claim revenue deduction because though the assessee paid for it in this year, i.e., assessment year 1965-66, in fact, the expenditure had been incurred in earlier years. We, therefore, reject the assessee's claim for deduction of research and development expenditure paid for by the assessee to HAL but direct that depreciation shall be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be manufactured thereafter. In the words of the Supreme Court in Ciba's case [1968] 69 ITR 692, 'by making that technical knowledge available, the foreign company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business'. The agreement with M/s. WABCO collaborators in the instant case for imparting technical know-how is of similar pattern that was considered by this court in the said Full Bench decision. The payment made herein towards technical assistance fee must, therefore, be regarded as revenue expenditure. It may also be stated that similar amount paid by BEML to WABCO collaborators after its incorporation has been allowed by the ITO as revenue expenditure. As to the other reason given by the Tribunal in this context, it is equally untenable. The Tribunal has observed that the assessee-company was not manufacturing any article or any type of earth moving equipment before entering into the collaboration agreement and it obtained drawings and designs by way of technical assistance for initial outlay of the business. The Tribunal appears to have made a distinction between initial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odification, question No. (v) is answered in the negative and in favour of the assessee. So question No. (vi) relating to the alternative claim of the assessee for deduction of the sum of Rs. 3,59,510 on amortised basis need not be answered. Question No. (iii) This question relates to the direction issued by the Tribunal to the AAC to reconsider the ITO's request for enhancement of assessment in respect of technical assistance fee of Rs. 4,79,750 paid by BEML to WABCO collaborators for the assessment year 1965-66. The Tribunal gave the direction on the basis that the amount paid as technical assistance fee should be considered as capital expenditure. As we have earlier observed that the technical assistance fee paid by the assessee is a revenue expenditure, it is needless to state that this question has to be answered in the negative and in favour of the assessee. We accordingly answer the question. Question No. (i): This takes us to question No. (i) which has been referred at the instance of the Revenue. This question again relates to the amount paid by BEML to WABCO collaborators as technical assistance fee in respect of which the Tribunal directed depreciation allowanc ..... 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