Technical know-how acquired from foreign collaborator by issuing equity shares held capital spend; only depreciation allowed, not s.37 deduction.

The dominant issue was whether consideration paid to a foreign collaborator for technical know-how, discharged by issue of equity shares, constituted revenue expenditure deductible under s.37 of the Income-tax Act or capital expenditure eligible only for depreciation. Relying on SC authority holding that where technical know-how is obtained in exchange for equity shares-particularly by a new company-the outlay is not revenue in character but confers an enduring advantage, the HC held the Tribunal erred in treating it as revenue expenditure. The payment was determined to be capital expenditure, with only depreciation allowable as per law, and the reference was answered in favour of the Revenue.

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Issues Involved:
The issue involves determining whether a payment made to a foreign collaborator in the form of equity shares should be treated as revenue expenditure spread over a period of ten years or as capital expenditure over which permissible depreciation allowance may be allowed.

Judgment Details:

Factual Background:
The assessee, a private limited company engaged in manufacturing compressed asbestos fibre sheets, entered into a collaboration agreement with a foreign concern for technical know-how. The agreement involved payment of Rs.1 lakh in equity shares, royalty payments, and training of staff. The dispute arose when the assessee claimed the payment as revenue expenditure, which was rejected by the Income-tax Officer and confirmed by the Appellate Assistant Commissioner.

Tribunal Proceedings:
The Tribunal, upon hearing, had a difference of opinion between the Accountant Member and the judicial Member. The Accountant Member viewed the amount as allowable revenue expenditure annually, while the judicial Member considered it as "plant" eligible for depreciation. The matter was referred to the Third Member, who sided with the Accountant Member, deeming the expenditure as revenue in nature.

Court's Decision:
The High Court, after considering the arguments, referred to a similar case in Eimco K. C. P. Ltd. v. CIT, where it was held that technical know-how amount was of capital nature when equity shares were obtained. As the expenditure was related to technical know-how and the assessee was a new company, the Court concluded that the expenditure was of capital nature, entitling the assessee to depreciation allowance. Therefore, the Court answered the question in favor of treating the expenditure as capital in nature.

Conclusion:
The High Court disposed of the income-tax references, affirming that the expenditure in question should be treated as capital in nature, making the assessee eligible for depreciation allowance as per the law.

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