Technical know-how qualifies as depreciable asset for tax purposes

The High Court affirmed the Tribunal's decision in favor of the assessee, allowing the depreciation claim for the sum paid as 'know-how and licence fee' in the assessment year 1976-77. The judgment clarified that the technical know-how acquired constitutes plant under the Income-tax Act, qualifying as a depreciable asset. Consequently, the expenditure was considered part of the cost of new plant and machinery for depreciation purposes, in line with the broad definition of "plant" and the functional test applied to determine depreciable assets.

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Issues involved:
Interpretation of whether a sum paid as 'know-how and licence fee' forms part of the cost of new plant and machinery for depreciation in the assessment year 1976-77.

Detailed Analysis:
The judgment concerns a dispute regarding the treatment of a sum paid by an assessee as 'know-how and licence fee' in the assessment year 1976-77. The assessee claimed this amount as capital expenditure, seeking depreciation as it formed part of the cost of machinery and plant. The Assessing Officer initially rejected this claim, leading to an appeal before the Commissioner of Income-tax (Appeals) who allowed the depreciation based on the views expressed in a previous case. The Revenue challenged this decision before the Tribunal, which upheld the Commissioner's decision. The Tribunal then referred the question to the High Court for opinion.

The central issue revolves around whether the expenditure in question resulted in the acquisition of plant or machinery by the assessee. The Income-tax Act allows depreciation only on specified assets owned by the assessee and used for business purposes. The definition of "plant" under section 43(3) is broad, including technical know-how as depreciable assets, as established in a previous Supreme Court case.

The judgment extensively discusses the concept of "plant," citing various legal precedents to define the term. It emphasizes that plant includes any article or object used in a business, not limited to mechanical apparatus. The functional test is crucial in determining whether an item qualifies as plant, focusing on its role in the business operation. Applying this test to the case at hand, the High Court concludes that the technical know-how acquired by the assessee falls within the definition of plant and is a depreciable asset.

In light of the legal principles and precedents cited, the High Court affirms the Tribunal's decision, ruling in favor of the assessee and allowing the depreciation claim. The judgment concludes by disposing of the reference accordingly.

In summary, the judgment clarifies the treatment of 'know-how and licence fee' as part of the cost of new plant and machinery for depreciation purposes, emphasizing the broad definition of "plant" under the Income-tax Act and the functional test to determine depreciable assets.

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