1977 (11) TMI 31 - HC - Income Tax

Deductions for Collaboration Agreement Designs Upheld as Revenue Expenses

The High Court affirmed that expenses for using drawings and designs under collaboration agreements were revenue deductions for the assessment years ... Capital Or Revenue Expenditure, Collaboration Agreement, High Court Issues involved: The judgment involves the issue of revenue deductions for assessment years 1962-63, 1963-64, and 1964-65 u/s 256(1) of the Income Tax Act, 1961, in relation to collaboration agreements with foreign manufacturers.Assessment Year 1962-63 and 1963-64:The assessee entered into collaboration agreements with foreign manufacturers, obtaining rights to manufacture certain machines under license. The agreements specified that the assessee could use drawings and designs provided by the foreign collaborators for the duration of the agreements. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) considered the expenditure on technical know-how as capital in nature due to its enduring effect. However, the Tribunal held that the payments were for the use of drawings and designs, not for acquiring a capital asset, and were akin to royalty payments. The Tribunal concluded that the expenses were incurred for the purpose of carrying on the business and allowed the deductions claimed.Assessment Year 1964-65:Similar to the previous years, the Tribunal considered the nature of the advantage obtained under the collaboration agreements and determined that the expenditure was allowable as revenue expenditure, wholly and exclusively laid out for the purpose of the assessee's business. The Tribunal's decision aligned with the Gujarat High Court's ruling on similar agreements, emphasizing uniformity in interpreting statutory provisions across High Courts. As there were no gross errors or mistakes pointed out, the High Court upheld the Tribunal's decision, answering the questions in favor of the assessee.Conclusion:The High Court affirmed that the expenses for using drawings and designs under the collaboration agreements were revenue deductions, following the precedent set by the Gujarat High Court. The judgment emphasized the importance of consistency in interpreting tax laws across different jurisdictions. The parties were directed to bear their own costs for the references.