Deduction allowed for technical know-how, disallowed for entertainment expenses exceeding limit. Interest on borrowed money included in actual cost.

The court allowed the deduction of Rs. 47,602 as revenue expenditure for technical know-how. However, it disallowed the deduction of Rs. 36,446 spent on lodging and catering, considering it as entertainment expenditure exceeding the allowable limit. The court also confirmed that the interest paid on borrowed money could be treated as part of the actual cost for depreciation and development rebate.

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Issues Involved:
1. Whether the interest paid on borrowed money could be treated as part of the actual cost for depreciation and development rebate.
2. Whether the sum of Rs. 47,602 paid under an agreement for technical know-how is deductible as revenue expenditure.
3. Whether the sum of Rs. 36,446 spent on lodging and catering for guests is allowable as a deduction under the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Interest on Borrowed Money
The third question, regarding whether the interest paid on borrowed money could be treated as part of the actual cost for the purpose of depreciation and development rebate, is covered by the Supreme Court decision in Challapalli Sugars Ltd. v. Commissioner of Income-tax. The court answered this question in the affirmative, in favor of the assessee.

Issue 2: Deduction of Rs. 47,602 as Revenue Expenditure
The first question concerns the deductibility of Rs. 47,602 paid by the assessee-company under an agreement with M/s. Fuller & Co., U.S.A. The agreement aimed to secure a license and technical know-how to manufacture and sell Fuller equipment in India. Under clause 10(a) of the agreement, the assessee was required to make annual payments of 10,000 U.S. dollars for ten years for the supply of technical information and manufacturing know-how.

The Tribunal disallowed the deduction, viewing the payment as capital expenditure. However, the court referred to the principles laid down by the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, which distinguishes between capital and revenue expenditure based on the purpose and nature of the expenditure. The court noted that the expenditure was for securing technical know-how to manufacture and sell Fuller equipment, which was integral to the profit-making process and not for acquiring a capital asset or a right of a permanent character.

The court also referred to the Supreme Court decision in Commissioner of Income-tax v. Ciba of India Ltd., where similar payments for technical know-how were considered revenue expenditure. The court found that the object and purpose of the agreement in the present case were similar to those in Ciba's case. The court concluded that the expenditure was related to the carrying on of the business and was an integral part of the profit-making process, thus qualifying as revenue expenditure. The first question was answered in the affirmative, in favor of the assessee.

Issue 3: Deduction of Rs. 36,446 for Lodging and Catering
The second question concerns the deductibility of Rs. 36,446 spent on lodging and catering for guests during the inaugural function of the company's heavy engineering works. The Income-tax Officer disallowed the entire expenditure, considering it as capital expenditure. However, the Appellate Assistant Commissioner allowed the deduction, viewing it as incidental to the business. The Tribunal, while agreeing that the expenditure was for business purposes, disallowed the specific amounts of Rs. 9,128 and Rs. 27,318 as entertainment expenditure under section 37(2) of the Income-tax Act, 1961.

The court noted that section 37(2) overrides section 37(1) and imposes a limit on the deduction of entertainment expenditure. The amounts spent on lodging and catering were clearly in the nature of entertainment expenditure and exceeded the allowable limit of Rs. 5,000. Therefore, the Tribunal was correct in disallowing these amounts. The second question was answered in the negative, against the assessee.

Conclusion:
The court answered the first question in the affirmative, allowing the deduction of Rs. 47,602 as revenue expenditure. The second question was answered in the negative, disallowing the deduction of Rs. 36,446 spent on lodging and catering. The third question was answered in the affirmative, treating the interest paid on borrowed money as part of the actual cost for depreciation and development rebate. No order as to costs was made.

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