COMMISSIONER OF INCOME-TAX vs. ELECON ENGINEERING CO.LTD.

PDF · subscribers
ITR/49/1988HC GujaratGJHC24013126198818 January 2001Author: HONOURABLE MR. JUSTICE J.M.PANCHAL,HONOURABLE MR. JUSTICE MOHIT S. SHAH3 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the assessee is entitled to the allowance of technical know-how fees of Rs. 7,16,654/- paid to WCW, West Germany, as revenue expenditure. The Court relied on its previous decisions in CIT vs. Sayaji Iron & Engg. Co. Ltd. and CIT vs. Suhrid Geigy Ltd., which established that acquiring blueprints, drawings, and technical know-how that supplement existing business and do not constitute a new venture are allowable as revenue expenditure. For the second question, the Court found that the know-how was acquired on behalf of Negveli Lignite Corporation, which had paid the assessee, and the assessee had merely passed on the payment to the German company. Since the assessee did not utilize the know-how, it was entitled to the allowance of Rs. 1,12,30,810/-. The ratio is that expenses incurred for supplementing existing business operations are revenue in nature, and payments made by an intermediary for services not utilized by it are deductible.

What were the facts?

The assessee, Elecon Engineering Co. Ltd., is in appeal against the Income Tax Appellate Tribunal's decision concerning assessment year 1981-82. The assessee had paid Rs. 7,16,654/- as the third installment for technical know-how from WCW, West Germany, under an agreement dated December 13, 1978, approved by the Government of India. The assessee also paid Rs. 1,12,30,810/- as technical design fees to Weserhutte, West Germany, as per an agreement dated August 6, 1980. The latter payment was made because the know-how was acquired on behalf of Negveli Lignite Corporation, which had reimbursed the assessee. The assessee claimed both amounts as revenue expenditure. The Income Tax Officer rejected both claims, but the Commissioner of Income Tax (Appeals) and the Tribunal upheld the assessee's claims.

What were the issues?

1. Whether, in law and on facts, the assessee is entitled to the allowance of technical know-how fees of Rs. 7,16,654/- paid to WCW, West Germany, as revenue expenditure, under Section 37(1) of the Income Tax Act, 1961. 2. Whether, in law and on facts, the assessee is entitled to the allowance of Rs. 1,12,30,810/- paid as technical design fees to foreign collaborators, as revenue expenditure, under Section 37(1) of the Income Tax Act, 1961. Assessee's Contentions: The assessee contended that both payments were for technical know-how and designs that supplemented its existing business and did not involve a new venture, thus qualifying as revenue expenditure. For the second claim, the assessee argued it acted merely as an intermediary, having been reimbursed by Negveli Lignite Corporation. Revenue's Contentions: The revenue's contentions are not explicitly recorded in the judgment, but their challenge to the allowance of these expenses implies they considered them to be capital in nature or not deductible for other reasons.

Which sections of the Income-tax Act were involved?

Section 37(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 49 of 1988

For Approval and Signature:

Hon'ble MR.JUSTICE J.M.PANCHAL and Hon'ble MR.JUSTICE M.S.SHAH

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus ELECON ENGINEERING CO.LTD. -------------------------------------------------------------- Appearance: MR BB NAIK with MR MANISH R BHATT for Petitioner MR RK PATEL for Respondent No. 1

--------------------------------------------------------------

CORAM : MR.JUSTICE J.M.PANCHAL and MR.JUSTICE M.S.SHAH

Date of decision: 18/01/2001

ORAL JUDGEMENT (Per : MR.JUSTICE J.M.PANCHAL)

At the instance of the revenue, the Income-tax Appellate Tribunal, Ahmedabad Bench "B" has referred the following two questions of law for the opinion of this Court in respect of assessment year 1981-82 :-

1.

Whether, in law and on facts the assessee is entitled to allowance of technical know-how fees of Rs,7,16,654/- paid to WCW, West Germany ?

2.

Whether, in law and on facts the assessee is entitled to allowance of Rs.1,12,30,810/- being payments as technical design fees to foreign collaborators ?

2.

The assessee had paid an amount of Rs.7,16,654/being the payment of the third instalment in pursuance of an agreement with WCW, West Germany for providing technical know-how, drawings, designs, documents, manufacturing and commissioning instructions and all other data for manufacture of vehicle gears. The agreement was entered into on December 13, 1978 and was approved by the Government of India on 29.3.1979. The total consideration of DM 4,74,000 was payable in three instalments and the third instalment of Rs.7,16,654/- was paid by the assessee during the year under assessment. The assessee had claimed allowance of the same as revenue expenditure. The assessee had also paid a sum of Rs.1,12,30,810/- as fees for designs, calculations, manufacturing drawings, specifications etc. to Weserhutte, West Germany as per the agreement dated August 6, 1980. This payment was claimed as a deduction for the reason that know-how etc. had been acquired on behalf of another Company by the name of Negveli Lignite Corporation. This Company had paid the amount to the assessee i.e. Elecon Engineering for this know-how and Elecon Engineering had only further paid the amount to the German Company. Hence, the assessee had claimed that it is only an intermediary and, therefore, the payment to WAG was deductible in the computation of its total income. Both the claims were rejected by the ITO but upheld by the CIT(A) and Tribunal.

3.

We have heard the learned counsel for the parties. In CIT vs. Sayaji Iron & Engg. Co. Ltd., (1994) 210 ITR 950, the Division Bench of this Court has held that improvisation by acquisition of blue prints, drawings, technical know-how, etc. from the foreign know-how pertains to a product already in the line of the established business and is intended to improve the operations of the existing business, its efficiency and profitability in the area of day-to-day business of the assessee's established enterprise, the expenses must be treated as revenue and not capital.

In view of the principle laid down in the above referred to two decisions of this Court, we are of the opinion that the assessee is entitled to allowance of technical know-how fees of Rs.7,16,654/- paid to WCW, West Germany as revenue expenditure. Question No. 1 referred to us is, therefore, answered in the affirmative i.e. in favour of the assessee and against the revenue.

4.

So far as question No. 2 is concerned, we find that know-how was acquired by the assessee on behalf of another Company by the name of Negveli Lignite Corporation. This Company had paid the assessee Company for this know-how and the assessee had further paid the amount to the German Company. The know-how was never utilized by the assessee. Therefore, in our view, the assessee is entitled to the allowance of Rs.1,12,30,810/- being payments as technical design fees to foreign collaborators. Question No. 2 is answered in the affirmative i.e. in favour of the assessee and against the revenue.

The reference accordingly stands disposed of with no order as to costs.

(J.M. Panchal, J.)

(M.S. Shah, J.)

sundar/-

More judgments on Section 37(1)

All 6,995 judgments and leading authorities on Section 37(1) →

Recent GST High Court judgments

Search GST case law →