Revenue nature of royalty and compliance expenditure, while computer peripheral depreciation depends on item-wise functional examination.

Depreciation on computer peripherals and accessories depends on item-wise examination of whether each item functions independently or forms an integral part of the computer system, so the claim was remitted for fresh factual verification. Royalty paid under a technical collaboration agreement was treated as revenue expenditure because it was a recurring, sales-linked payment for limited use of know-how without transfer of proprietary rights, and the disallowance was deleted. Expenditure on a secure landfill system and allied works was also held to be revenue in nature because it was incurred to meet environmental and pollution-control obligations necessary for business operations, so the addition was deleted.

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Issues: (i) Whether depreciation at the higher rate was allowable on computer peripherals and accessories; (ii) Whether royalty paid under a technical collaboration agreement was capital expenditure or revenue expenditure; (iii) Whether expenditure on secure landfill system and allied works was capital in nature or allowable business expenditure.

Issue (i): Whether depreciation at the higher rate was allowable on computer peripherals and accessories.

Analysis: The issue was remitted because the nature of each item had to be examined to determine whether the peripherals could function independently or whether they formed an integral part of the computer system. The earlier remand in the assessee's own case required the Assessing Officer to decide the claim item-wise after examining functional independence and the applicable depreciation treatment.

Conclusion: The issue was remitted to the Assessing Officer for fresh examination.

Issue (ii): Whether royalty paid under a technical collaboration agreement was capital expenditure or revenue expenditure.

Analysis: The payment was held to be for technical services and not for transfer of ownership in technology. It was a recurring payment linked to sales, the agreement was limited in duration, and the assessee acquired only a restricted right to use the know-how without proprietary rights. The jurisdictional High Court had already held in the assessee's own case that such royalty constituted a continuing business outlay.

Conclusion: The royalty expenditure was revenue expenditure and the disallowance was deleted.

Issue (iii): Whether expenditure on secure landfill system and allied works was capital in nature or allowable business expenditure.

Analysis: The expenditure was incurred to comply with environmental and pollution-control requirements for handling hazardous waste generated in the manufacturing process. It was necessary for carrying on the business and the alleged enduring benefit was not substantiated. Expenditure incurred to meet a statutory obligation and facilitate business operations was treated as revenue in nature.

Conclusion: The expenditure was allowable as business expenditure and the addition was deleted.

Final Conclusion: The appeal succeeded only in part, with the depreciation issue sent back for reconsideration and the remaining additions deleted.

Ratio Decidendi: Expenditure incurred for recurring technical services or to satisfy a statutory/business necessity is revenue in nature, while depreciation on computer peripherals depends on their functional relationship with the computer system and may require item-wise factual examination.

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