Running royalty for technical know-how held revenue expenditure, not capital; Southern Switchgears lump sum case distinguished

HC upheld the CIT(A) and ITAT findings that royalty paid for technical know-how was revenue expenditure, not capital expenditure. The agreement provided for running royalty payable annually, computed per piece of catalytic converters and exhaust mufflers produced, making the outlay directly linked to production volume. HC distinguished the SC decision in Southern Switchgears Ltd., where a lump sum royalty was held to be capital in nature, noting the fundamentally different terms of payment. As a result, HC confirmed the assessee's claim of revenue deduction for royalty and rejected the Revenue's challenge.

---

---

Issues: (i) Whether claim for additional depreciation in a revised return could be disallowed solely for non-furnishing of Form No. 3AA in the original return; (ii) Whether royalty payments under the agreements in issue are capital expenditure or revenue expenditure.

Issue (i): Whether claim for additional depreciation in a revised return could be disallowed solely for non-furnishing of Form No. 3AA in the original return.

Analysis: The revised return was filed within the limitation period and the question of entitlement to additional depreciation under Section 32(1)(iia) was examined. The requirement to furnish Form No. 3AA (audit report) was considered in light of precedent holding that furnishing of Form No. 3AA is directory rather than mandatory. The assessment officer's reliance on the absence of Form No. 3AA in the original return to deny the claim was reviewed and contrasted with the propriety of accepting the revised return filed within time.

Conclusion: The disallowance of additional depreciation solely on the ground that Form No. 3AA was not furnished with the original return is not sustainable; the claim in the timely revised return stands allowed.

Issue (ii): Whether royalty payments under the agreements are capital expenditure or revenue expenditure.

Analysis: The nature of the agreements and the attendant circumstances were considered, including the quantum and mode of payment (running royalty payable per piece of production), whether the license conferred enduring proprietary benefits, and comparisons with authorities where lump-sum payments or absolute transfers were held capital in nature. Applying established principles for distinguishing capital and revenue expenditure, the agreements were found to provide for access/licence under which royalty varies annually with production rather than an absolute transfer of technical know-how conferring an enduring advantage.

Conclusion: The royalty payments under the agreements are revenue expenditure and not capital expenditure; the assessment finding to the contrary is reversed.

Final Conclusion: Both substantive issues decided on merits favour the assessee: the additional depreciation claim in the timely revised return cannot be denied for non-furnishing of Form No. 3AA in the original return, and the royalties payable under the agreements are revenue in nature.

Ratio Decidendi: Where a licence grants access to technical knowledge with running royalty tied to production and does not confer an absolute, enduring transfer of proprietary rights, payments under such licence are revenue expenditure; absence of an audit report in the original return is directory and does not justify disallowance of a claim made in a revised return filed within the limitation period.

---