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Commissioner Of Income-Tax v. Standard Polygraph Machines Pvt. Ltd.
Factual and Procedural Background
The issue arises from the assessment year 1981-82 concerning whether Rs. 80,000 out of Rs. 5,05,682, representing income-tax paid by a non-resident, can be treated as part of the cost of plant and machinery for the purposes of depreciation and investment allowance. The assessee claimed that the income-tax paid in respect of the consideration paid to a foreign collaborator should be included in the actual cost of the plant and machinery. This claim was initially accepted by the Income-tax Officer but was later negated by the Commissioner in suo motu revision under section 263 of the Income-tax Act, 1961. The Tribunal reversed the Commissioner’s decision, holding that the tax paid by the assessee was a liability of the foreign collaborator, which the assessee had undertaken to pay under the agreement with the collaborator, and thus should be treated as part of the value of the plant and machinery.
Legal Issues Presented
- Whether the sum of Rs. 80,000 out of Rs. 5,05,682 being the income-tax payable by the non-resident is entitled to be treated as cost of the plant and machinery, thereby becoming eligible for depreciation and investment allowance?
Arguments of the Parties
Assessee's Arguments
- The income-tax paid by the assessee on the consideration paid to the foreign collaborator should be included as part of the actual cost of the plant and machinery.
- This inclusion entitles the assessee to claim depreciation and investment allowance on the total cost including the tax.
- The liability to pay the tax was undertaken by the assessee as per the agreement with the foreign collaborator.
Revenue's Arguments
- The Commissioner, in suo motu revision, negated the claim that the income-tax amount should be part of the cost of plant and machinery.
- The Revenue contended that the income-tax paid should not be treated as part of the cost eligible for depreciation or investment allowance.
- The Revenue did not produce the terms of the agreement between the collaborator and the assessee before the court.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Festo Elgi Pvt. Ltd., [1981] 129 ITR 499 | Technical know-how supplied to the assessee constitutes tools for carrying on business and forms part of capital assets, allowing depreciation and development rebate on amounts paid. | The court relied on this precedent to affirm that payments to foreign collaborators, including associated liabilities like income-tax undertaken by the assessee, form part of the capital asset cost eligible for depreciation. |
Court's Reasoning and Analysis
The court analyzed the nature of the income-tax payment made by the assessee on behalf of the foreign collaborator. It noted that the Tribunal had correctly held the tax payment to be a discharge of the collaborator's liability, which the assessee had agreed to pay under the terms of their agreement. The court emphasized that the Revenue failed to produce the agreement terms, necessitating acceptance of the Tribunal’s findings. It reasoned that the tax payment was effectively part of the consideration for receiving technical know-how from the foreign collaborator. The court also referred to the precedent in CIT v. Festo Elgi Pvt. Ltd., which established that such payments form part of capital assets and are eligible for depreciation and investment allowance. Hence, the tax paid was not a separate or incidental expense but integral to the cost of the plant and machinery.
Holding and Implications
The court answered the question in favor of the assessee and against the Revenue.
This decision means that the sum of Rs. 80,000 paid as income-tax on behalf of the foreign collaborator is to be treated as part of the cost of the plant and machinery, making it eligible for depreciation and investment allowance. The ruling directly affects the parties by allowing the assessee to claim these tax payments as capital expenditure. No broader precedent beyond the application of existing principles was established.
R. Jayasimha Babu, J.:— The question referred to us at the instance of the Revenue is:
“Whether, the sum of Rs. 80,000 out of Rs. 5,05,682 being the income-tax payable by the non-resident is entitled to be treated as cost of the plant and machinery, thus becoming eligible for depreciation and investment allowance?”
2. The assessment year is 1981-82.
3. The assessee claimed that the amount of income-tax paid by the assessee in respect of the consideration paid by the assessee to the foreign collaborator should also form part of the actual cost of the plant and machinery on which depreciation and investment allowance should be allowed. That claim was accepted by the Income-tax Officer, but negatived by the Commissioner in suo motu revision under section 263 of the Income-tax Act, 1961. The Tribunal has held that the amount of tax paid by the assessee should be regarded as liability of the foreign collaborator which the assessee had undertaken to pay as per the agreement entered into with the collaborator. The Tribunal therefore held that it should be treated as part of the value of plant and machinery of the assessee.,
4. This court in the case of CIT v. Festo Elgi Pvt. Ltd., [1981] 129 ITR 499, has held that the technical know-how supplied to the assessee constitutes tools for carrying on the business of the assessee and forms part of the capital assets and therefore depreciation and development rebate was allowable on the amount paid to the foreign collaborator. The Revenue has not produced before us the terms of the agreement entered into between the collaborator and the assessee and we must therefore accept what has been stated by the Tribunal. The Tribunal has held that the amount paid by the assessee as income-tax on the amount paid to the foreign collaborator was only the discharge of the liability of the collaborator which liability the assessee had undertaken to pay as part of the agreement entered into with the foreign collaborator for receiving the technical know-how under the agreement. The amount so paid as tax has been held to be an amount payable by virtue of the terms of the agreement between the collaborator and the assessee. Had the collaborator not been assured of the assessee undertaking the liability, the collaborator would have charged higher fee to cover the liability for taxes. It is only on the assurance of the assessee that the liability will be met by the assessee, the collaborator had agreed to receive the sum specified in the agreement. The Tribunal was right in its view that the amount so paid by the assessee was only in discharge of a liability which it had undertaken in terms of the agreement entered into between the assessee and the collaborator and it, therefore, forms part of the consideration for the agreement relating to know-how.
5. We, therefore, answer the question in favour of the assessee and against the Revenue.
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