1988 (3) TMI 118 - AT - Income Tax

Tax Court Decision: Royalty Payments Categorized as Capital Expenditure

The court upheld the addition to the assessee's total income by the Income Tax Officer due to royalty payments made to another company for acquiring ... - Issues:- Whether the addition made by the ITO to the assessee's total income on account of royalty paid to another company is correct.Analysis:1. The judgment involves two appeals concerning the addition made by the ITO to the assessee's total income due to royalty payments to M/s My Lady Cosmetics (India) Pvt. Ltd.2. The amounts disallowed for the assessment years 1983-84 and 1984-85 were Rs. 42,165 and Rs. 25,248, respectively.3. The assessee company entered into an agreement with M/s. My Lady Cosmetics (India) Pvt. Ltd., granting a license to use the name of My Fair Lady for cosmetics, with royalty payment terms.4. Another agreement was reached for manufacturing hair removing creams and waxes, involving technical know-how provision for royalty payments.5. Dispute arose over the capital nature of the royalty payment for the manufacturing formula with exclusive rights, deemed by authorities as capital acquisition.6. Assessee argued against the acquisition of an enduring capital asset due to technological advancements and limited utility of the know-how.7. The Revenue supported the CIT(A)'s order.8. The judge considered various authorities cited by both parties, emphasizing the distinction between capital and revenue expenditures.9. The principle derived from the authorities highlighted the nature of expenditure based on acquiring know-how or exploiting trade names, patents, etc.10. The judge categorized the royalty payments under revenue expenditure for trade name use and capital expenditure for acquiring know-how with enduring benefits, as illustrated by precedents.11. Concluding that the royalty payment for acquiring know-how was for a capital asset, the judge upheld the CIT(A)'s decision, rejecting the appeals of the assessee.