1995 (12) TMI 19 - HC - Income Tax

Expenditure for specific order ruled as revenue, not capital. Assessee prevails over Department.

The Court held that the expenditure for obtaining drawings and related travelling expenses were revenue in nature, as they were incurred to fulfill a ... Enduring Benefit, Foreign Company, Revenue Expenditure Issues Involved:1. Whether the sum of Rs. 56,567 paid for obtaining drawings and Rs. 15,000 as travelling expenses for procuring said drawings should be allowed as revenue expenditure.2. Whether the Income-tax Officer was correct in treating the expenditure as capital expenditure.Issue-wise Detailed Analysis:1. Nature of Expenditure for Obtaining Drawings and Travelling Expenses:The primary issue was whether the expenditure of Rs. 56,567 for obtaining drawings from Zenith Carburettors Limited and Rs. 15,000 as travelling expenses for procuring these drawings should be classified as revenue expenditure or capital expenditure. The assessee, a manufacturer of carburettors, claimed these expenses as revenue expenditure. The Income-tax Officer, however, treated them as capital expenditure.On appeal, the Commissioner of Income-tax (Appeals) noted that the drawings were acquired for a specific one-time order from the Defence Department, with no expectation of future orders. Given the rapid technological advancements, the designs would not hold permanent value. Thus, the Commissioner deleted the addition of Rs. 71,657, treating it as revenue expenditure. The Tribunal upheld this decision, agreeing that the expenditure was not of enduring benefit.2. Department's Argument on Capital Expenditure:The Department argued that the drawings were purchased outright, without any obligation to return them, and thus provided an enduring benefit. Citing various precedents, the Department contended that the expenditure should be classified as capital in nature. They referenced cases such as Fenner Woodroffe and Co. Ltd. v. CIT, Addl. CIT v. Southern Structurals Ltd., CIT v. Southern Switchgear Ltd., Kirloskar Oil Engines Ltd. v. CIT, and Scientific Engineering House P. Ltd. v. CIT, where similar expenditures were deemed capital due to the enduring benefits they conferred.3. Assessee's Argument on Revenue Expenditure:The assessee countered that the drawings were purchased to meet the specific requirements of a one-time order from the Defence Department and did not constitute a secret formula or technical know-how. The expenditure was necessary to fulfill a particular business exigency and did not provide lasting benefits. The assessee relied on the Supreme Court decision in Alembic Chemical Works Co. Ltd. v. CIT, which emphasized the importance of the purpose and context of the expenditure over the notion of enduring benefit.4. Court's Analysis and Conclusion:The Court examined the facts and noted that the expenditure's classification as capital or revenue depends on the specific circumstances of each case. The Court referenced the Supreme Court's decision in Scientific Engineering House P. Ltd. v. CIT, where the expenditure was deemed capital due to the enduring benefits and technical know-how acquired under a collaboration agreement.However, the Court found that in the present case, the drawings were purchased solely to meet a specific, temporary business need, without any package deal or enduring benefits. The Court emphasized that the rapid advancements in technology and the temporary nature of the order from the Defence Department meant the drawings did not provide a lasting advantage. Applying the principles from Alembic Chemical Works Co. Ltd. v. CIT, the Court held that the expenditure was revenue in nature.Final Judgment:The Court concluded that the Tribunal was correct in holding that the expenditure for obtaining the drawings and the related travelling expenses were revenue in nature. The questions referred were answered in the affirmative, against the Department, with no costs.