Deductibility of Technical Know-How Expenditure as Revenue Expense

The court determined that the expenditure on technical know-how was deductible as revenue expenditure under section 37(1) of the Income-tax Act, 1961, as it was for acquiring information and guidance, not constituting a capital asset. The court held that the expenditure could not be considered part of the actual cost of machinery for depreciation allowance and development rebate, as it was solely for acquiring know-how, not tangible assets like machinery or plant. The Revenue was directed to pay the costs of the reference to the assessee.

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Issues Involved:
1. Whether the expenditure on technical know-how is "capital" or "revenue".
2. Whether the expenditure can be considered as part of the cost of machinery for depreciation allowance and development rebate.

Summary:

Issue 1: Nature of Expenditure (Capital vs. Revenue)
The court had to decide if the expenditure of Rs. 66,899 and Rs. 33,499 incurred by the assessee for technical know-how was deductible as revenue expenditure u/s 37(1) of the Income-tax Act, 1961. The Tribunal had held that the payment was for the acquisition of technical know-how for all time, thus constituting an asset of an enduring nature, and classified it as capital expenditure. The court reviewed various cases, including the Supreme Court decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 and the Bombay High Court decision in CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. [1980] 123 ITR 538, which emphasized that technical know-how, especially in a fast-changing technological environment, does not confer an enduring advantage. The court concluded that the payments made by the assessee were for acquiring information and guidance, which should be considered as revenue expenditure.

Issue 2: Depreciation Allowance and Development Rebate
The second issue was whether the expenditure could be considered as part of the actual cost of machinery or plant for the purposes of depreciation allowance u/s 32 and development rebate u/s 33. The Tribunal found that the payment was solely for the acquisition of know-how and not for any tangible asset like machinery or plant. The court referred to the Supreme Court decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, which allowed depreciation on interest paid before the commencement of production as part of the cost of the asset. However, since the Tribunal found no part of the payment attributable to setting up the plant, the court held that the claim for depreciation and development rebate was not tenable.

Conclusion:
1. Question 1: The amounts of Rs. 66,899 and Rs. 33,499 were deductible as revenue expenditure for the respective assessment years.
2. Question 2: Unnecessary to answer in light of the answer to Question 1.

The Revenue was ordered to pay the costs of the reference to the assessee.

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