2008 (3) TMI 679 - HC - Income Tax

License Fee Payments for Technology Upgrades in Headlights Deemed Revenue Expenditures, Not Capital Assets.

Commissioner of Income-tax Versus Lumax Industries Ltd.

The HC dismissed the appeal, affirming that the license fee payments made by the appellant for enhancing existing technology in manufacturing headlights ... Long-term advantage of an enduring advantage - Payment towards licence fee for acquisition of technical knowledge - revenue or capital expenditure - AO unable to explain why after a gap of almost 10 years decide to treat the expenditure incurred by the assessee as a capital expenditure - HELD THAT:- We do not find any reason to differ with the opinion on the facts of this case and it is quite clear that the ratio of the decisions of the Supreme Court in Jonas Woodhead & Sons (India) Ltd.’s case [1997 (2) TMI 4 - SUPREME COURT] and Empire Jute Co. Ltd.’s case [1980 (5) TMI 1 - SUPREME COURT] were fully applicable to the facts of this case and both the authorities were right in concluding that the payments made by the assessee towards licence fee to SECL was a revenue expenditure. We may note that the Assessing Officer had allowed 75 per cent of the expenditure but had disallowed only 25 per cent of the licence fee. Therefore, the dispute is limited only to the 25 per cent amount. No substantial question of law arises - Appeal is dismissed. Issues:Interpretation of agreement for manufacturing headlights of motor vehicles, classification of expenditure as revenue or capital, applicability of Circular No. 21 of 1969, consistency in treatment of expenditure over financial years.Analysis:The judgment involves a dispute over an agreement between the appellant, engaged in manufacturing headlights of motor vehicles since 1945, and SECL, entered into in 1984. The Assessing Officer contended that the agreement conferred an asset of enduring nature, leading to the rejection of the claimed license fee as revenue expenditure.The Commissioner of Income-tax (Appeals) (CIT(A)) ruled in favor of the appellant, emphasizing that the agreement did not involve setting up a new plant or machinery, but rather an enhancement of existing technology for efficiency and profitability. The CIT(A) cited precedents like Jonas Woodhead & Sons (India) Ltd. v. CIT and Empire Jute Co. Ltd. v. CIT to support the recurring nature of the expenditure.Furthermore, the CIT(A) referred to Circular No. 21 of 1969, highlighting that payments for technical knowledge may not necessarily create an enduring asset. The CIT(A) concluded that the license fee payments were revenue expenditures, consistent with the treatment in previous financial years.The Tribunal upheld the CIT(A)'s decision, emphasizing that even if the appellant gained an enduring advantage, it wouldn't automatically classify the expenditure as capital. The High Court concurred with the lower authorities, noting that the payments towards license fee were revenue expenditures, in line with legal precedents and factual analysis.It was observed that the Assessing Officer had initially allowed a portion of the expenditure but later disallowed 25% of the license fee, leading to the limited dispute over this amount. Ultimately, the High Court dismissed the appeal, finding no substantial question of law to arise from the case.