High Court: Tax paid by non-resident part of plant cost for depreciation

The High Court of Madras ruled in favor of the assessee, determining that the income-tax paid by a non-resident should be considered part of the cost of plant and machinery for depreciation and investment allowance purposes. The court held that the tax payment was a discharge of the foreign collaborator's liability, forming part of the value of the plant and machinery as per the agreement terms. This decision aligned with the treatment of technical know-how as capital assets, allowing for depreciation and development rebate on amounts paid to foreign collaborators.

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Issues involved: Whether the income-tax paid by a non-resident can be treated as part of the cost of plant and machinery for depreciation and investment allowance.

Summary:
The High Court of Madras considered the issue of whether a sum of Rs. 80,000 paid as income-tax by a non-resident out of a total amount of Rs. 5,05,682 could be considered as part of the cost of plant and machinery for the purpose of claiming depreciation and investment allowance. The assessee argued that the tax amount should be included in the actual cost of the plant and machinery, a claim initially accepted by the Income Tax Officer but later negated by the Commissioner under section 263 of the Income Tax Act, 1961. The Tribunal, however, determined that the tax paid should be treated as a liability of the foreign collaborator, forming part of the value of the plant and machinery.

In a previous case, the court had established that technical know-how provided to an assessee constitutes capital assets, allowing for depreciation and development rebate on amounts paid to foreign collaborators. The Tribunal's decision was supported by the fact that the tax payment was considered a discharge of the collaborator's liability, undertaken by the assessee as per the agreement. The collaborator had agreed to receive a specified sum based on the assurance that the assessee would cover tax liabilities, which influenced the overall agreement terms. Consequently, the court upheld the Tribunal's view that the tax payment formed part of the consideration for the know-how agreement.

Therefore, the court ruled in favor of the assessee, concluding that the income-tax paid by the non-resident should be treated as part of the cost of plant and machinery for depreciation and investment allowance purposes, contrary to the revenue's position.

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