COMMISSIONER OF INCOME-TAX VS SUPER STEELS
1991 P T D 48
[Punjab and Haryana High Court (India)]
Before Gokal Chand Mital arid S.S. Sodhi, JJ
COMMISSIONER OF INCOME-TAX
Versus
SUPER STEELS
Income-tax Reference No. 90 of 1981, decided on 01/03/1989.
Income-tax---
----Capital or revenue expenditure ---Assessee-company engaged in manufacture of steel and wires---Manufacture of wires of different qualities with improved technique by obtaining technical know how---Expenditure incurred for obtaining know-how was for a running concern---No assets of enduring nature acquired-- Expenditure is revenue in nature.
For the assessment year 1975-76, the assessee-company, which manufactured mild steel and hard bright wires, incurred expenditure for acquiring technical know-how for manufacturing different types of wires and also to improve its polishing technique, and claimed deduction for the same as revenue expenditure. The Income-tax Officer disallowed the claim for deduction on the ground that by obtaining the technical know-how, the earning capacity of the assessee's business improved considerably which resulted in benefit of an enduring nature and as such was capital expenditure. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. But the Tribunal held that the expenditure was of a revenue nature. On a reference:
Held, that the assessee was a manufacturing concern and while their manufacturing process was on, they wanted to diversify the manufacture of wires of different qualities with improved technique and for doing so obtained technical know-how which resulted in increase in production and sales. The expenditure for obtaining know-how for a running concern could never be said to be capital expenditure for acquiring an asset of an enduring nature. Therefore, the amount paid to the consultants for obtaining technical know-how was revenue expenditure.
Mysore Kirloskar Ltd. v. C.I.T. (1978) 114 ITR 443 (Kar.); C.I.T. v. B.N. Elias and Co. (P.) Ltd. (1987) 168 ITR 190 (Cal.) and C.I.T. v. Ciba of India Ltd. (1968) 69 ITR 692 (S C) fol.
Scientific Engineering House (P.) Ltd. v. C.I.T. (1986) 157 ITR 86 (S C) distinguished.
C.I.T. v. Caltex Oil Refining (India) Ltd. (1979) 116 ITR 404 (Bom.) and C.I.T. v. Tata Engineering and Locomotive Co. (Pvt.) Ltd. (1980) 123 ITR 538 (Bom.) ref.
Ashok Bhan, Senior Advocate and Ajay Mittal for the Commissioner.
Amita Gupta for the Assessee.
JUDGMENT
GOKAL CHAND MITAL J.--Super Steels had been manufacturing wires from the assessment year 1973-74 onwards. -To start with, it was manufacturing mild steel and hard bright wires. In the accounting year, which ended on June 30, 1974, relevant to the assessment year 1975-76, it acquired technical know-how to manufacture different types of wires and also to improve its polishing technique. For acquiring technical know-how, Rs. 50,000 was paid to Metallurgical and Mech. (P.) Ltd. During the assessment proceedings, the assessee claimed the deduction of the aforesaid amount as revenue expenditure but the Income-tax Officer concluded that by obtaining technical know-how the earning capacity improved considerably which resulted in benefit of enduring
nature and as such treated it as capital expenditure and did not allow the deduction. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer but, on further appeal, the Income-tax Appellate Tribunal, Delhi, took notice of the Full Bench Judgment of the Karnataka High Court in Mysore Kirloskar Ltd. v. C.I.T. (1978) 114 ITR 443, and observed that the facts were very close to the facts of the case in hand and concluded that the expenditure was of revenue nature. They also found that the decisions of the Bombay High Court in C.I.T. v. Caltex Oil Refining (India) Ltd. (1979) 116 ITR 404 and C.I.T. v. Tata Engineering and Locomotive Co. (Pvt.) Ltd. (1980) 123 ITR 538, supported the assessee's claim. As a result, the appeal was allowed and the deduction was treated as revenue expenditure. On these facts, the Tribunal has referred the following question for opinion:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 50,000 was of revenue nature and not of capital nature?"
On a consideration of the matter, we are of the opinion that the Tribunal came to the right conclusion that the amount paid to the consultants for obtaining know-how was of a revenue nature. The assessee was a manufacturing concern and while their manufacturing process was on, they wanted to diversify the manufacturing of wires of different qualities with improved technique and for doing so, obtained technical know-how. Not only did it obtain technical know how, as found by the Income-tax Officer, but the production and sales also increased. The expenditure for obtaining know-how for a running concern can. never be said to be capital expenditure for acquiring an asset of enduring nature. For this decision of ours, we find support from the decisions of the Calcutta High' Court in C.I.T. v. B.N. Elias and Co. (P) Ltd. (1987) ITR 190 and Mysore Kirloskar Ltd.'s case (1978) 114 ITR 443 (Kar) (FB).
On behalf of the Revenue, reliance was sought to be placed on the decision of the Supreme Court in Scientific Engineering House (P.) Ltd. v. C.I.T. (1986) 157 ITR 86, to support the decision of the Income-tax Officer. The facts of that case were entirely different. There, the assessee had obtained certain documents on payment of a lump sum and debited the amount in its account books under the head "Library" and during the assessment proceedings, claimed Rs. 12,000 by way of depreciation on "Library". The Supreme Court came to the conclusion that all the documents obtained by the assessees constituted a "book" and fell within the definition of "plant" contained in section 43(3) of the Act and since depreciation was allowable on all items contained in that section, the assessee was entitled to depreciation on the documents which constituted "book". There, the assessee himself had considered the expenditure for obtaining the documents constituting "book", as expenditure of a capital nature and claimed depreciation. Hence, the point before us was not considered there.
On the other hand, another decision of the Supreme Court in C.I.T. v. Ciba of India Ltd. (1968) 69 ITR 692, which was relied upon by the Full Bench of Karnataka High Court in Mysore Kirloskar Ltd.'s case (1978) 114 ITR 443 supports the assessee's case that by obtaining technical know-how, the assessee does not acquire any asset or advantage of enduring nature.
For the reasons recorded above, we hold that the expenditure incurred by the assessee in obtaining technical know-how was not of a capital nature and answer the referred question in favour of the assessee in the affirmative, leaving the parties to bear their own costs.
M.BA./792/T Order accordingly.