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Citation Codes
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citation codes
Case Number
Judges
  • Arijit Pasayat, C.J
  • D.K Jain, J.
Acts
  • section 256(1) of the Income-tax Act, 1961 (in short, the Act),
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Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Arijit Pasayat, C.J
  • D.K Jain, J.
Acts
  • section 256(1) of the Income-tax Act, 1961 (in short, the Act),
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Smart Summary

Summary of Opinion — Arijit Pasayat, C.J.

Factual and Procedural Background

These petitions raise an identical question referred by the Income-tax Appellate Tribunal, Delhi Bench, under section 256(1) of the Income-tax Act, 1961, concerning treatment of an amount paid to a foreign collaborator. The assessment years in issue include 1971-72 to 1977-78 across several reference petitions (I.T.R Nos. 187–191 of 1980; I.T.R No. 266 of 1981; I.T.R No. 110 of 1981).

The assessee was a private limited company engaged in the manufacture of compressed asbestos fibre sheets which entered into a collaboration agreement with a foreign concern for technical know-how. Under the agreement a sum of Rs. 1 lakh was payable in the form of equity shares which were allotted to the foreign concern; royalty at 3% on ex-factory selling price was payable for ten years subject to conditions. The agreement provided for supply of technical literature, data, drawings, manufacturing processes, formulae, information, advice and know-how, and for training a reasonable number of the assessee's staff in the foreign collaborator's factories.

The assessee claimed that the payment of Rs. 1 lakh in the form of 10,000 equity shares (described in the opinion as "10,000 equity shares of Rs. 10 lakhs written off in ten instalments over a period of ten years") should be treated as revenue expenditure written off over ten years. The Income-tax Officer rejected the claim; the Appellate Assistant Commissioner confirmed the rejection on appeal. Before the Tribunal there was a difference of opinion: the Accountant Member allowed the annual write-off as revenue expenditure, the Judicial Member treated the amount as "plant" eligible for depreciation. The Third Member agreed with the Accountant Member and held the expenditure to be of revenue nature. The Tribunal referred the question to this Court. For the later assessment years the Tribunal relied on its decision for 1971–72 to 1975–76 and granted relief to the assessee.

Legal Issues Presented

  1. 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 should 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?

Arguments of the Parties

Revenue's Arguments

  • The Revenue submitted that the expenditure in question was capital in nature and that the Judicial Member's view (treating it as capital/plant and eligible for depreciation) was the correct view which should be adopted.

Assessee's Position

  • There was no appearance on behalf of the assessee in this Court despite notice.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Eimco K.C.P Ltd. v. CIT, [2000] 242 ITR 659 Held that where a foreign company gives technical know-how and obtains equity shares in the new company, the amount attributable to technical know-how is not revenue expenditure under section 37 of the Act but is of capital nature. The Court relied on this authority to conclude that the expenditure in the present case was of capital character; the Tribunal was therefore not justified in holding the expenditure to be revenue in nature, and depreciation (as available in law) should be granted.

Court's Reasoning and Analysis

The Court considered the core issue—whether the payment made in the form of equity shares to the foreign collaborator was revenue expenditure or capital in nature. It noted that a similar question was considered by the apex court in Eimco K.C.P Ltd. v. CIT, where it was held that amounts attributable to technical know-how acquired by a company in exchange for equity shares are not revenue in nature but capital.

The opinion also records that the assessee was a new company. Applying the principle in Eimco K.C.P Ltd. v. CIT to the facts before it, the Court concluded that the Tribunal's finding of revenue expenditure was not justified. Because the expenditure was of capital nature, the correct treatment was to permit depreciation as provided by law.

Holding and Implications

Holding: The amount paid in the form of equity shares to the foreign collaborator is capital expenditure and not revenue expenditure; the permissible depreciation is to be allowed.

Implications: The Tribunal's conclusion that the expenditure was revenue in nature was set aside. The direct effect is that the expenditure must be treated as capital expenditure and depreciation is available to the assessee in accordance with law. The Court disposed of these income-tax references. The opinion does not purport to lay down any novel principle beyond applying the cited authority.

Show full summary ...

    Commissioner Of Income-Tax v. Reinz Talbros Pvt. Ltd.

    Arijit Pasayat, C.J:— All these petitions involve an identical issue and are, therefore, disposed of by this common order.

    2. I.T.R Nos. 187 to 191 of 1980 relate to the assessment years 1971-72 to 1975-76, I.T.R No. 266 of 1981 relates to the assessment years 1976-77 and I.T.R No. 110 of 1981 relates to the assessment year 1977-78. The question referred, under section 256(1) of the Income-tax Act, 1961 (in short, “the Act”), by the Income-tax Appellate 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 Income-tax Officer (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 Income-tax Officer. 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 section 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.

    4. On being moved for reference, the Tribunal, as set out above, referred the question for the assessment years 1971-72 to 1975-76.

    5. For the other years, the Tribunal relied on the judgment relating to the assessment years 1971-72 to 1975-76 and granted relief to the assessee.

    6. 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.

    7. A similar question came up before the apex court in Eimco K.C.P Ltd. v. CIT, [2000] 242 ITR 659. 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 section 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.

    8. These income-tax references are disposed of.

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    Comments

    Commissioner Of Income-Tax v. Reinz Talbros Pvt. Ltd.
    (Mar 21, 2001)