High Court: Deferred Revenue Expenditure Deductible, Devaluation Profit Not Taxable

The High Court held that the amount debited to the 'Deferred Revenue Expenditure Technical Know-how Payment Account' was revenue expenditure, not capital in nature. The court allowed the deductions claimed by the assessee and upheld the deletion of the profit on the devaluation of pound sterling from the taxable income. The court ruled in favor of the assessee on both issues, emphasizing that the expenditure did not provide an enduring advantage and that the profit on devaluation was not taxable due to the nature of the borrowed capital.

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Issues:
1. Whether the amount debited by the assessee to 'Deferred Revenue Expenditure Technical Know-how Payment Account' was expenditure of capital natureRs.
2. Whether the assessee was entitled to depreciation in respect of the said amountRs.
3. Whether the profit on devaluation of pound sterling was correctly deleted from the taxable income of the assessee-companyRs.

Analysis:
The case involved two references under section 256(1) of the Income Tax Act, 1961. The assessee, a public limited company in the business of manufacturing turbines and machinery for sugar mills, entered into agreements with two English parties. The agreements involved payments of 40,000 pounds and 50,000 pounds to the parties, with corresponding advances given to the assessee for repayment. The assessee capitalized 8 lakhs and debited 4 lakhs to 'Deferred Revenue Expenditure Technical Know-how Payment Account'. The Revenue disallowed deductions, considering the expenditure as capital in nature. The Tribunal upheld the Revenue's decision for four assessment years, leading to references to the High Court.

The High Court referred to a previous judgment and concluded that the amount debited to the 'Deferred Revenue Expenditure Technical Know-how Payment Account' was revenue expenditure, not capital in nature. The court noted that there was no absolute parting of the secret process and technical knowledge by the collaborators to the assessee, indicating no enduring advantage acquired. The amount of 4 lakhs was held to be revenue expenditure, benefiting the assessee.

Regarding the profit on the devaluation of pound sterling, the High Court clarified a factual misunderstanding in the record. The court determined that the loan of 50,000 pounds received by the assessee was not part of circulating capital but fixed capital earmarked for conversion into equity shares. Citing the Supreme Court's ruling, the High Court held that the profit or loss arising from foreign currency appreciation or depreciation is trading profit if held on revenue account or as trading asset. Since the amount was borrowed capital, the profit on devaluation was not taxable.

In conclusion, the High Court ruled in favor of the assessee on both issues, allowing the deductions claimed and upholding the deletion of the profit on the devaluation of pound sterling from the taxable income. No costs were awarded based on the facts and circumstances of the case.

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