COMMISSIONER OF INCOME-TAX VS KIRLOSKAR PNEUMATIC CO. LTD, 1994 PTD-BOMBAY-HIGH-COURT-INDIA 445 (1993)

(a) Income-tax---

----Capital or revenue expenditure---General principles---Amount paid by way of technical fees---Revenue expenditure---Indian Income Tax Act, 1961, S.37.

In determining whether a particular expenditure is revenue or capital, what is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to business realities. In a given case, the test of "enduring benefit." might break down. The idea of "once for all payment" and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial "fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. It would be unrealistic to ignore the rapid advances in research and to attribute a degree of endurability and permanence to technical know how at any particular stage in this fast-changing area of science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to bear the element of the requisite degree of durability to share the requirement and qualifications of an enduring capital asset.

The assessee-company carried on the business of manufacturing and selling of air compressors, pneumatic tools, etc. In the assessments for the assessment years 1970-71, 1971-72 and 1973-74, it claimed the technical fees paid to W of. U.K. and cost of drawings paid to T of U.S.A. as revenue expenditure. The Income-tax Officer disallowed the claim. On appeal, the Appellate Assistant Commissioner allowed it in part. On second appeal, the Tribunal allowed it in full. For the assessment year 1970-71, the assessee also claimed as a revenue expenditure the costs of drawings paid to H. This claim was also disallowed by the Income-tax Officer. The disallowance was upheld by the Appellate Assistant Commissioner. However, on second appeal, the Tribunal allowed the claim. In the assessment for the assessment year 1973-74, the assessee made a claim for depreciation on capital assets used for scientific research related to its' business. This claim also, though initially rejected by the income-tax Officer, was allowed by the Tribunal. On a reference:

Held that by making the payments to W, T and H, the assessee did not acquire any asset or benefit of enduring nature and the payments made by it were allowable as revenue expenditure.

Alembic Chemical Works Co. Ltd. v. C.I.T. (1989) 177 ITR 377 (SC); C.I.T. v. Kirloskar Pneumatic Co. Ltd. (1987) 163 ITR 560 (Bom) and Kirloskar Pneumatic Co. Ltd. v. C.I.T. (1982) 136 ITR 746 (Bom) fol.

(b) Income-tax---

-----Depreciation---Scientific research---Assets used for scientific research related to the assessee's business---Depreciation cannot be claimed in respect of such assets---Indian Income Tax Act, 1961, Ss.32 & 35.

Depreciation was not allowable on the capital assets used for scientific research related to the assessee's business.

Escorts Ltd. v. Union of India (1993) 199 ITR 43 (SC) fol.

Dr. V. Balasubramanium with P.S. Jetley for the Commissioner.

G. Krishnan for the Assessee.

JUDGMENT

DR. B. P. SARAF, J: --This reference has been made' by the Income -tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue. It relates to three assessment years, viz., 1970-71, 1971-72 and 1973-74. Four questions have been referred by the Tribunal. The first two questions are common to all the three assessment years. The third and fourth questions relate to assessment years 1970-71 and 1973-74, respectively. These questions are:

For the assessment years 1970-71, 1971-72 and 1973-74:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment by way of technical fees to Messrs Westing House Brake and Signal Co. Ltd. in the respective previous years relevant to the assessment years 1970-71, 1971-72 and 1973-74 was a permissible deduction?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment by the assessee -company to Messrs Twin Disc. Company of U.S.A. in the respective previous years relevant to the assessment years 1970-71, 1971-72 and 1973-74 was a permissible deduction?

For the assessment year 1970-71 only:

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment by the assessee- company to Messrs. Hitachi (Centrifugal) and Messrs Hitachi (Air and Gas Compressors) in the previous year relevant to the assessment year 1970-71 was a permissible deduction?"

For the assessment year 1973-74 only:

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that depreciation on capital assets which were used for scientific research related to the assessee's business was allowable?"

The assessee, Messrs Kirloskar Pneumatic Co. Ltd., carries on the business of manufacturing and selling of air compressors, pneumatic tools, etc: In the assessments for the assessment years 1970-71, 1971-72 and 1973-74, it claimed the technical fees paid to Messrs Westing House Brakes and Signal Co. Ltd. of U.K. and cost of drawings paid to Messrs Twin Disc. Co. of U.S.A. as revenue expenditure. The Income-tax Officer disallowed the claim. On appeal, the Appellate Assistant Commissioner of Income-tax allowed it in part. On second appeal, the Tribunal allowed it in full in view of its earlier decision on the same contention in appeal for the assessment year 1972-73.

For the assessment year 1970-71, the assessee also claimed as a revenue expenditure the cost of drawings paid to Messrs Hitachi (Air and Gas Compressors). This claim was also disallowed by the Income-tax Officer. The disallowance was upheld by the Appellate Assistant Commissioner. However, on second appeal, the Tribunal allowed the claim as it found that admittedly the assessee's claim in regard to the payments made to Messrs Hitachi was on facts similar to its claim in regard to Westing House Air and Signal Co. Ltd, which already had been allowed by it. In such circumstances, it was held by the Tribunal that the payments made by the assessee on account of cost of drawings to Messrs Hitachi were also revenue expenditure.

In the assessment for the assessment year 1973-74, the assessee made a claim for depreciation on capital assets used for scientific research related to its business. This claim also, though initially rejected by the Income-tax Officer, was allowed by the Tribunal. It is this allowance, which is the subject-matter of controversy in question No.4.

So far as the first three questions are concerned, the real dispute is whether under the facts and circumstances of the case, technical fees and cost of drawings paid by the assessee is revenue expenditure or capital expenditure. The Tribunal, on a consideration of materials before it, held it to be revenue expenditure. The case of the Revenue is that it is capital expenditure as, according to it, the assessee derived enduring benefit from the payments made in question. According to the assessee, it is revenue expenditure. In support of its contention, the assessee relies on a decision of this Court in its own case in respect of earlier years reported in Kirloskar Pneumatic Co. Ltd. v. C.I.T. (1982)136 ITR 746), which was followed in its own case for. a subsequent year in C.I.T. v. Kirloskar Pneumatic Co. Ltd. (1987) 163 ITR 560), wherein, on a consideration of identical facts and similar arguments, this Court had held that the assessee did not acquire any asset or benefit of an enduring nature and the payments made by it were allowable as revenue expenditure. In the above cases, the payments on account of supply of drawings were also held to be revenue expenditure. Learned counsel for the assessee submits that in view of these decisions in the assessee s own case, the expenditure incurred in the three assessment years under reference should also be held to be revenue expenditure.

We have considered the submissions. On perusal of the above decisions, we find force in the submission. We do not find any distinguishing feature in the present case justifying any deviation from the decisions of this Court rendered in the assessee's own case in respect of earlier years on similar facts. Under the circumstances, it is difficult to hold that the aforesaid decisions are not applicable to the present case.

Our attention was also drawn by learned counsel for the assessee to a recent decision of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. C.I.T. (1989) 177 ITR 377), in support of the contention that the expenditure in question should be held to be revenue expenditure. We have carefully considered the above decision. The Supreme Court in the above case has clearly spelt out the approach that should be taken in determining whether a particular expenditure is revenue or capital. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. In a given case, the test of "enduring benefit" might break down.

Giving a note of caution against indiscriminate application of "once for all payment" and "enduring benefit" tests, the Supreme Court made the following observations (at page 386):

"The idea of `once for all payment' and `enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of `capital' or `revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal, verities but must needs be flexible so as to respond to the changing economic realities of business."

The concept of "once for all payment" and "enduring benefit", has therefore, to be applied in the light of the decision of the Supreme Court. The Supreme Court, in the above case, took note of the rapid advances in research and the effect thereof on endurability of the technical know-how and observed as follows (headnote):

"It would be unrealistic to ignore the rapid advances in research and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset."

In view of the decisions of this Court in the assessee's own case and the decision of the Supreme Court referred to above, we are of the clear opinion that the expenditure incurred by the assessee in the instant case by way of technical fees and drawing charges is revenue expenditure. The first three

questions are, therefore, answered in the affirmative, that is in favour of the assessee and against the Revenue.

So far as the fourth question is concerned, it is fairly stated by counsel for the parties that this question is now squarely covered against the assessee and in favour of the Revenue by the latest decision of the Supreme Court in the case of Escorts Ltd. v. Union of India (1993) 199 ITR 43). Following the said decision, we answer question No.4 in the negative, that is, in favour of the Revenue and against the assessee.

Under the facts and circumstances of the case, we make no order as to costs.

M.B.A./26/T.F.Order accordingly.