SCIENTIFIC ENGLNEERING HOUSE (P) LTD. vs. COMISSIONER OF INCOME TAX, ANDHRA PRADESH

CIVIL APPEAL No. 262/1974Supreme Court1985 INSC 23501 November 1985Bench: 2 JudgesAuthor: V.D. TULZAPURKAR, SABYASACHI MUKHERJI16 pages
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What were the facts?

The appellant-assessee, engaged in manufacturing scientific instruments, entered into two collaboration agreements in March 1961 with a Hungarian company for manufacturing microscopes and theodolites. The foreign collaborator agreed to supply technical know-how, including "documentation service" comprising drawings, designs, charts, plans, and other literature, for a payment of Rs. 80,000 per agreement, totaling Rs. 1,60,000. The assessee paid this amount, debiting it to "Library." For assessment year 1966-67, the assessee claimed Rs. 12,000 as depreciation on this "Library." The Income Tax Officer disallowed depreciation, viewing the payment as capital expenditure for know-how that didn't create a tangible asset. The Appellate Assistant Commissioner allowed depreciation, considering the documents as a "book." The Tribunal, however, held the payment partly capital and partly revenue, allowing Rs. 12,000 as revenue expenditure, not depreciation. The High Court ruled the expenditure was capital for a non-depreciable asset, denying relief. Similar denials occurred for assessment years 1968-69 and 1969-70.

What did the Supreme Court hold?

The Supreme Court held that the expenditure incurred by the appellant for the purchase price of drawings, designs, charts, plans, processing data, and other literature comprised in the "documentation service" was of a capital nature, resulting in the acquisition of a capital asset of technical know-how. The Court found that the "documentation service" was not incidental but the main service for which the payment of Rs. 1,60,000 was made. Applying the functional test for "plant," which includes any article or object used by a businessman for carrying on his business with some degree of durability, the Court concluded that these documents, when collectively treated as a "book," fulfilled the function of a plant. They were considered the basic tools of the assessee's trade with enduring utility, enabling the commencement of manufacturing activity. Therefore, the capital asset acquired, namely the technical know-how in the shape of these documents, was held to fall within the definition of "plant" and was a depreciable asset. The Court approved the Gujarat High Court's decision in CIT, Gujarat v. Elecon Engineering Co. Ltd. The question was answered in favour of the assessee, holding that the payment was attributable wholly towards the acquisition of a depreciable asset.

What were the issues?

1. Whether the technical know-how in the shape of drawings, designs, charts, plans, and other literature, comprised in "documentation service," falls within the definition of "Book" and "Plant" under the Income Tax Act, 1961, making it a depreciable asset? Assessee's Contention: The assessee argued that the "documentation service" constituted an outright purchase of documents on special paper, which, when collected, formed a "book." They contended this "book" qualified as "plant" and was therefore eligible for depreciation, similar to plant and machinery. Revenue's Contention: The revenue contended that the payment was for acquiring technical know-how, which was capital expenditure. They argued that since no tangible or depreciable asset was brought into existence, no depreciation allowance could be claimed. The Tribunal, while not directly addressing the "book" or "plant" definition, viewed the payment as partly capital and partly revenue, allowing a portion as revenue expenditure. The High Court agreed it was capital expenditure but for a non-depreciable asset.

Which sections of the Income-tax Act were involved?

Section 32,Section 34,Section 43(3)

AI-generated summary — verify with the full judgment below

I 701 SCIENTIFIC ENGlNEElUNG l!OUSE (P) LTD. v. COltilSSIONER OF INCOME TAX, ANDllRA PRADESH NOVEMBER 1, 1985 [V,D, TULZAPURKAR AND SABYASACHI MUKHARJI, JJ.] Income Tax Act, 1961 sectiona 32, 34 and 43 (3) - llefini- tiona of ''Book", "Plant" - Whether the technical know-how in the shape of drawings and designs, charts, plants, processing litera- ture etc. comprised in "documentation service" falls within the definition of "Book", "Plant" - Whether the said "documentation service" not only "a capital asset" but also "a depreciable asset 11 • l'he appellant-asaessee manufactures scientific instruments and apparatus like Dumpy levellers, levelling staves priamatic compass, etc. It entered into two separate collaboration agree- ments, one dated 15th March, 1961 and the other dated 31st March 1961 with M/s. Metrimpex Hungarian Trading Company, Budapest for undertaking the manufacture of microscopes and theodolites, under which the said collaborator, in consideration of payment of Rs.80,000 each (Rs. 1,60,000 under both the agreements together), agreed to supply to the asse8see all the technical know-how required for the manufacture of tliese instruments. To ensble

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