1982 (4) TMI 61 - HC - Income Tax

Expenses ruled as revenue, depreciation not applicable. Assessee wins case, awarded costs.

The court held that the expenditure of Rs. 4 lakhs was of a revenue nature and not capital, thus depreciation was not applicable. Similarly, the ... Depreciation And Development Rebate, Plant Issues Involved:1. Whether the amount of Rs. 4 lakhs debited to 'Deferred Revenue Expenditure, Technical know-how Payment Account' was expenditure of a capital nature.2. If the answer to the first issue is affirmative, whether the assessee-company was entitled to depreciation in respect of the said amount.3. Whether the amount of Rs. 1,09,191 paid to Brotherhoods Ltd. represented expenditure of a capital nature.4. If the answer to the third issue is affirmative, whether the assessee-company was entitled to depreciation in respect of the whole or part of the amount.Issue-wise Detailed Analysis:1. Nature of Expenditure of Rs. 4 Lakhs:The Tribunal considered whether the amount of Rs. 4 lakhs paid by the assessee to 'Deferred Revenue Expenditure, Technical know-how Payment Account' was of a capital nature. The assessee argued that the payment was for technical know-how, which should be considered revenue expenditure. However, the ITO and AAC held that the expenditure was of a capital nature, as it was for acquiring technical know-how for manufacturing steam turbines and other engineering products, which the assessee did not have before. The Tribunal upheld this view, concluding that the payment was for acquiring an asset of enduring benefit and was thus capital in nature.2. Depreciation on Rs. 4 Lakhs:The Tribunal addressed whether the assessee was entitled to depreciation on the Rs. 4 lakhs if it was considered capital expenditure. The Tribunal held that the technical know-how covered by clause 3(b) of the agreement was not related to the installation or setting up of the plant or design organization. It was concerned with the techniques of using the plant and machinery for manufacturing end products. Therefore, it was not a part of the plant and machinery, and the claim that the know-how was a plant because it was recorded in the form of papers, drawings, and books was not accepted. Consequently, the assessee was not entitled to depreciation on the amount of Rs. 4 lakhs.3. Nature of Expenditure of Rs. 1,09,191:The Tribunal considered whether the amount of Rs. 1,09,191 paid to Brotherhoods Ltd. for converting measurements and calculations in drawings from the British to the metric system was of a capital nature. The ITO and AAC held that the expenditure was capital in nature as it resulted in an enduring benefit to the assessee. The Tribunal apportioned the expenditure, allocating Rs. 72,000 to the ancillary drawings and designs organization and the balance to the initial know-how. The Tribunal concluded that the expenditure related to the initial know-how was not entitled to depreciation, whereas depreciation could be claimed on the amount allocated to the ancillary drawings and designs organization.4. Depreciation on Rs. 1,09,191:The Tribunal addressed whether the assessee was entitled to depreciation on the amount of Rs. 1,09,191 if it was considered capital expenditure. The Tribunal held that the additional expenditure for recalculating measurements to the metric system facilitated the use of the drawings and carrying on the operation. Since the expenditure on technical know-how was considered revenue expenditure, the amount of Rs. 37,191 allocated to it was also revenue expenditure. For the remaining Rs. 72,000 allocated to the ancillary drawings and designs organization, the Tribunal concluded that it was capital expenditure and entitled to depreciation, as it was part of the actual cost of setting up the plant and machinery.Conclusion:The court held that the expenditure of Rs. 4 lakhs was of a revenue nature and not capital. Consequently, the question of depreciation on this amount did not arise. Similarly, the expenditure of Rs. 1,09,191 for converting measurements was also considered revenue expenditure. Therefore, questions regarding depreciation on this amount did not need to be answered. The court ruled in favor of the assessee and awarded costs accordingly.