Delhi H.C : Whether, on the facts and in the circumstances of the case, the amount of Rs. 10,00,000 paid to the foreign collaborator Reinz in the form of equity shares be treated as revenue expenditure spread over a period of ten years or as capital expenditure over which the permissible depreciation allowance may be allowed?

High Court Of Delhi

CIT vs. Reinz Talbros (P) Ltd.

Section 37(1)

Asst. Year 1971-72, 1972-73, 1973-74, 1974-75, 1975-76, 1977-78

Arijit Pasayat, CJ. & D.K. Jain, J.

IT Ref. No. 187 of 1980

21st March, 2001

Counsel Appeared

Sanjiv Khanna with Ajay Jha, for the Revenue : None appeared, for the Assessee

JUDGMENT

ARIJIT PASAYAT, C.J. :

All these petitions involve an identical issue and are, therefore, disposed of by this common order.

2. IT Ref. Nos. 187 to 191 of 1980 relate to the asst. yrs. 1971-72 to 1975-76, IT Ref. No. 266 of 1981 relates to the asst. yrs. 1976-77 and IT Ref. No. 110 of 1981 relates to the asst. yr. 1977-78. The question referred, under s. 256(1) of the IT Act, 1961 (in short, “the Act”), by the Tribunal, Delhi Bench (in short, “the Tribunal”), for the opinion of this Court, in each of the reference petitions is as follows : “Whether, on the facts and in the circumstances of the case, the amount of Rs. 10,00,000 paid to the foreign collaborator Reinz in the form of equity shares be treated as revenue expenditure spread over a period of ten years or as capital expenditure over which the permissible depreciation allowance may be allowed?”

3. The factual background needs to be noted in brief and is essentially as follows : The assessee is a private limited company which, at the relevant point of time, was engaged in the manufacture of compressed asbestos fibre sheets. A collaboration agreement was entered into by it with a foreign concern for providing technical know-how in its manufacturing activities. As per the terms of the agreement entered into with the said foreign concern, a sum of Rs. 1 lakh was payable in the form of equity shares which were allotted to the concern. Royalty at the rate of 3 per cent, was also payable on ex-factory selling price of the products manufactured in collaboration, for a period of ten years subject to certain conditions. The agreement was primarily for the supply of appropriate technical literature, data drawings, manufacturing processes and other formula, information, advices and know-how for the manufacture of compressed asbestos fibre material by the foreign company. A provision was also made for training a reasonable number of staff of the assessee-company in the factories of the foreign collaborators. The assessee claimed that payment of Rs. 1 lakh in the form of 10,000 equity shares of Rs. 10 lakhs written off in ten instalments over a period of ten years be treated as revenue expenditure. The ITO (in short, “the ITO”) rejected the claim and on appeal by the assessee, the Appellate Assistant Commissioner (in short, “the AAC”) confirmed the action of the ITO. The matter was carried in further appeal before the Tribunal. When the case was heard by two Members of the Tribunal, there was a difference of opinion between them. While the Accountant Member considered the amount written off each year to be allowable as revenue expenditure in the respective year, the Judicial Member was of the view that the amount in question should be treated as “plant” to be entitled to depreciation. The matter was referred to the Third Member under s. 255(4) of the Act. The Third Member agreed with the view taken by the Accountant Member by holding that the expenditure claimed by the assessee was of revenue nature only.

On being moved for reference, the Tribunal, as set out above, referred the question for the asst. yrs. 1971-72 to 1975-76. For the other years, the Tribunal relied on the judgment relating to the asst. yrs. 1971-72 to 1975-76 and granted relief to the assessee.

We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessee in spite of notice. According to learned counsel for the Revenue, the issue is whether the expenditure, as claimed, was of capital nature or revenue in character. According to him, the Judicial Officer’s view was the correct one and should have been adopted. A similar question came up before the apex Court in Eimco K. C. P. Ltd. vs. CIT (2000) 159 CTR (SC) 137 : (2000) 242 ITR 659 (SC). It was held that where a foreign company gives a technical know-how and obtains equity shares in the new company, the amount attributable to technical know-how was not revenue expenditure under s. 37 of the Act. However, it was treated to be of capital nature. It is clearly borne out from the various orders that the assessee was a new company. That being the position, the Tribunal was not justified in holding that the expenditure in question was revenue in character. In other words, if it being of capital nature, depreciation as available in law has to be granted. The question is accordingly answered.

These IT references are disposed of.

[Citation : 252 ITR 637]

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