Court rules payments to foreign collaborator as capital expenditure; Commissioner can revise orders under appeal. Department wins case.

The court held that the sum of Rs. 2,35,000 paid by the assessee-company to the foreign collaborator constituted capital expenditure, not revenue expenditure. The court also determined that the Commissioner could exercise revisional powers under section 263 of the Income-tax Act, even if the order was under appeal before the Appellate Assistant Commissioner. The court ruled in favor of the Department, directing the assessee to pay the Department's costs and counsel's fee.

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Issues Involved:
1. Whether the sum of Rs. 2,35,000 paid by the assessee-company to the foreign collaborator constituted revenue expenditure.
2. Whether the Commissioner could interfere, acting u/s 263 of the Income-tax Act, 1961, with the order of the Income-tax Officer on a point which was directly in appeal before the Appellate Assistant Commissioner.

Summary:

Issue 1: Revenue vs. Capital Expenditure
The principal controversy was whether the sum of Rs. 2,35,000 paid by the assessee-company to the foreign collaborator constituted revenue expenditure. The assessee-company claimed this amount as allowable business expenditure of a revenue nature. The ITO rejected this claim, treating it as capital expenditure and allowed only 1/14th of the amount u/s 35A. The AAC upheld the ITO's view, rejecting the assessee's contention. The Tribunal, however, held that the sum represented an outgoing or expenditure by the assessee-company for acquiring technical know-how and allowed the entire claim as revenue expenditure.

The court accepted the Department's contention that the sum of Rs. 2,35,000 formed part of the capital of the assessee-company, and the method of allotment of shares to Eimco was a means of raising the company's initial share capital. The court held that the subscription for shares, otherwise than for cash, cannot be treated as an item of the company's expenditure. The court emphasized that expenses incurred for promoting or incorporating a company are not deductible as they are not for the purpose of carrying on the business. The court concluded that no expenditure in the trading sense had arisen in this case, and thus, there was no scope for the question of "capital versus revenue" being debated.

Issue 2: Commissioner's Revisional Powers u/s 263
The second issue was whether the Commissioner could interfere u/s 263 with the ITO's order on a point directly in appeal before the AAC. The Tribunal had accepted the assessee's contention that the Commissioner was barred from exercising his revisional power when the order of assessment was pending in appeal. The court, however, held that the revisional power u/s 263 is not barred merely because an appeal is pending before the AAC. The court noted that the revisional power is exercisable in cases where the ITO's order is prejudicial to the interests of the Revenue. The court clarified that the pendency of an appeal does not tie the Commissioner's hands from exercising his power.

The court concluded that the Commissioner's order was within his jurisdiction u/s 263 of the Act. The Tribunal's conclusion to the contrary was deemed incorrect. The court answered both questions of law in favor of the Department and against the assessee, disposing of the reference in the Department's favor. The assessee was directed to pay the costs of the Department, with counsel's fee set at Rs. 500.

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