1985 (10) TMI 87 - HC - Income Tax

Tribunal's Favorable Decisions on Income-tax Act References

The Tribunal's decisions in three references under section 256(1) of the Income-tax Act for assessment years 1966-67, 1968-69, and 1969-70 favored the ... Technical know-how as revenue expenditure - capital expenditure v. revenue expenditure - allowability of depreciation on cost including associated payments - roads and fencing as part of factory building for depreciation - treatment of perquisites under section 40 - application of proviso to section 40 where salary is exempt under section 10Allowability of depreciation on cost including associated payments - allowability of interest and expenses as part of actual cost - Whether interest and expenses in connection with the A.I.D. loan could be added to the actual cost of machinery for purpose of depreciation for assessment year 1966-67. - HELD THAT: - The parties accepted that, in view of the Supreme Court decision referred to in the statement of case, the Tribunal's conclusion that interest and related expenses connected with the loan could be treated as forming part of the actual cost of machinery for depreciation must be affirmed. The court recorded that question as agreed between counsel and answered it in the assessee's favour, sustaining the Tribunal's approach that such expenses be capitalised for depreciation purposes.Answered in the affirmative; interest and expenses connected with the A.I.D. loan form part of the actual cost of machinery for depreciation.Technical know-how as revenue expenditure - capital expenditure v. revenue expenditure - Whether the amount of Rs. 1,91,500 allocated to purchase of technical know-how is capital expenditure or revenue expenditure for assessment year 1966-67. - HELD THAT: - The court followed the Division Bench precedent of this court which held that technical know-how, being not a tangible asset and not conferring an enduring advantage akin to a capital asset in the facts of that case, must be treated as revenue expenditure. Counsel for Revenue conceded inability to distinguish that decision. Applying that reasoning to the admitted facts that the amount was paid for technical know-how, the court held the sum to be revenue in nature and allowable as deduction (spread as the Tribunal directed).The amount of Rs. 1,91,500 paid for acquisition of technical know-how is revenue expenditure and allowable as such.Roads and fencing as part of factory building for depreciation - allowability of depreciation on cost including associated payments - Whether roads and fencing form part of the factory building and are eligible for depreciation for assessment year 1966-67. - HELD THAT: - The parties agreed that, in view of the Division Bench decision of this court in the cited authority, the question must be answered in the affirmative. The court accepted that precedent and sustained the Tribunal's conclusion that roads and fencing constitute part of the factory building and are eligible for depreciation.Answered in the affirmative; roads and fencing form part of the factory building and depreciation is allowable.Treatment of perquisites under section 40 - application of proviso to section 40 where salary is exempt under section 10 - Whether perquisites provided to the foreign technician (A. P. Giusti) were to be disallowed under section 40(c)(iii) or section 40(a)(v) for assessment years 1968-69 and 1969-70. - HELD THAT: - The court examined the interplay between the exclusion of the employee's salary from total income under section 10 and the protective proviso to section 40's disallowance provision. Relying on a Division Bench decision of this court which construed the phrase 'seven thousand five hundred rupees or less' in the proviso to include nil amounts, and on the Madras High Court authority followed therein, the court held there is no requirement that any positive amount be chargeable under the head 'Salaries' for the proviso to apply. Consequently, where the employee's salary is excluded from total income under section 10, the proviso operates to prevent disallowance of perquisites under section 40, and the Tribunal was right to delete the disallowance.Perquisites to A. P. Giusti are not to be disallowed under section 40(c)(iii) or section 40(a)(v); the Tribunal correctly deleted the disallowance.Final Conclusion: All questions referred were answered in the affirmative and against the Revenue: (i) interest and related expenses connected with A.I.D. loan form part of actual cost for depreciation; (ii) the balance of the collaboration payment was to be treated as cost of plant with depreciation and the portion allocated to technical know-how is revenue expenditure; (iii) roads and fencing are part of factory building for depreciation; and (iv) perquisites to the exempt foreign employee are not disallowable under section 40, accordingly the Tribunal's deletions are sustained. The Commissioner to pay costs. Issues involved:The judgment involves three references under section 256(1) of the Income-tax Act, 1961, pertaining to assessment years 1966-67, 1968-69, and 1969-70. The issues include the treatment of interest and expenses on a loan, bifurcation of compensation paid to foreign collaborators, allowance of depreciation on roads and fencing, and the treatment of perquisites paid to an employee under sections 40(c)(iii) and 40(a)(v) of the Income-tax Act.Assessment year 1966-67:The Tribunal was justified in adding interest and expenses on a loan to the actual cost of machinery for depreciation. The balance amount of compensation paid to foreign collaborators was correctly treated as part of the actual cost of the plant for depreciation. The Tribunal was right in allowing depreciation on roads and fencing as part of the factory building.Assessment years 1968-69 and 1969-70:The Tribunal correctly held that perquisites paid to an employee were not to be considered under section 40(c)(iii) or section 40(a)(v) of the Income-tax Act, leading to the deletion of disallowance by the Income-tax Officer.The amount spent for purchasing technical know-how was considered revenue expenditure based on precedents and the nature of the expenditure. The salary paid to the employee was exempted from tax under section 10(6) of the Act, leading to the conclusion that perquisites were not to be included under section 40(c)(iii) or section 40(a)(v) of the Act.The decision was based on legal interpretations and precedents, including the treatment of technical know-how expenditure as revenue, and the exclusion of perquisites from taxable income under specific sections of the Income-tax Act. The Tribunal's rulings were upheld, and all questions were answered in favor of the assessee.