Royalty under a limited technology licence and written-off bad debts were both treated as allowable revenue deductions.

Royalty paid for a limited-term, non-exclusive, non-transferable and revocable licence to use trademarks and technology was treated as revenue expenditure because it gave only restricted access to technical know-how for the licence period, without transfer of ownership or any enduring advantage; the disallowance under section 37(1) was deleted. Provision for bad and doubtful debts was also allowed under section 36(1)(vii) where the amount was reduced from the debtors account in the balance sheet, showing an actual write-off in the books; that disallowance was likewise deleted.

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Issues: (i) Whether royalty paid under a limited-term, non-exclusive, non-transferable and revocable licence for use of trademarks and technology was capital expenditure or revenue expenditure allowable under section 37(1) of the Income-tax Act, 1961; (ii) Whether provision for bad and doubtful debts was deductible under section 36(1)(vii) of the Income-tax Act, 1961 when the corresponding amount stood reduced from the debtors account in the balance sheet.

Issue (i): Whether royalty paid under a limited-term, non-exclusive, non-transferable and revocable licence for use of trademarks and technology was capital expenditure or revenue expenditure allowable under section 37(1) of the Income-tax Act, 1961.

Analysis: The licence was for one year, carried no transfer of ownership in know-how, trademarks or technology, and did not confer exclusivity or any right to sub-license. The payment was recurrent and linked to sales during the licence term. On these facts, the assessee obtained only access to technical knowledge for a limited duration and not an asset or an enduring advantage.

Conclusion: The royalty payment was revenue expenditure and was allowable under section 37(1); the disallowance was correctly deleted.

Issue (ii): Whether provision for bad and doubtful debts was deductible under section 36(1)(vii) of the Income-tax Act, 1961 when the corresponding amount stood reduced from the debtors account in the balance sheet.

Analysis: The provision debited to the profit and loss account was simultaneously reduced from the trade receivables/debtors account, showing an actual write-off in the books. This satisfied the requirement recognised for deduction under section 36(1)(vii), and the provision applied to both banking and non-banking businesses.

Conclusion: The provision for bad and doubtful debts was allowable, and the disallowance was rightly deleted.

Final Conclusion: Both disputed additions failed, and the assessee's claim on royalty as well as bad-debt provision was upheld, resulting in rejection of the revenue appeal.

Ratio Decidendi: Where a licence to use know-how and trademarks is non-exclusive, non-transferable, revocable, and confined to a short term without transfer of ownership or enduring advantage, royalty paid under it is revenue expenditure; and a debt provision is deductible when the corresponding amount is actually written off by reducing the debtors balance in the accounts.

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