JYOTI ELECTRIC MOTORS LTD vs. COMMISSIONER OF INCOME TAX

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ITR/281/1983HC GujaratGJHC24011749198317 April 1998Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE KUNDAN SINGH4 pages
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What did the High Court hold?

The High Court held that the Tribunal was right in concluding that the Commissioner was justified in passing the order under Section 263 of the Income Tax Act, 1961. The Court reasoned that the payment for technical know-how, drawings, and designs, as per Article 4 of the licensing agreement, was for a benefit of an enduring nature. This was supported by the Supreme Court's decision in Jonas Woodhead & Sons (India) Limited vs. CIT (224 ITR 342), which held that sums paid for enduring benefits like technical know-how constitute capital expenditure. The Tribunal correctly distinguished the High Court's earlier decision in CIT vs. Jyoti Limited (supra) by noting that in that case, the property in the specifications and drawings did not pass to the assessee, unlike the present situation where an enduring benefit was acquired. The Commissioner lawfully exercised his powers under Section 263 after providing the assessee an opportunity to be heard. The assessment order was set aside with a direction for a fresh decision by the ITO.

What were the facts?

The assessee, Jyoti Electric Motors Ltd., for Assessment Year 1976-77, claimed a deduction of Rs. 3,25,927/- as royalty payment to Jyoti Limited for technical know-how. The Assessing Officer (ITO) allowed this deduction. The Commissioner of Income Tax (CIT) initiated proceedings under Section 263 of the Income Tax Act, 1961, considering the ITO's order erroneous and prejudicial to the revenue. The CIT believed the payment was for an enduring benefit and thus capital in nature. The assessee argued the royalty was a license fee and relied on CIT vs. Jyoti Limited (118 ITR 499). The CIT set aside the assessment order, directing a fresh examination of the agreement. The Income Tax Appellate Tribunal (ITAT) upheld the CIT's action, finding the expenditure prima facie capital in nature and the CIT justified in exercising Section 263 powers.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner was justified in passing the order under Section 263 of the Act in setting aside the assessment order? (Question of law) Assessee's contentions: The assessment order was neither erroneous nor prejudicial to the interest of the revenue. The ITO's order was in conformity with law and the decision in CIT vs. Jyoti Limited (supra). Therefore, the CIT had no valid grounds to exercise powers under Section 263. Revenue's contentions: The payment for technical know-how, drawings, and designs, which provided an enduring benefit, constituted capital expenditure. The CIT was justified in invoking Section 263 because the ITO's allowance of the deduction was erroneous and prejudicial to the revenue. The Tribunal rightly distinguished the case of CIT vs. Jyoti Limited (supra) based on the terms of the agreement.

Which sections of the Income-tax Act were involved?

Section 263,Section 256(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 281 of 1983

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question 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?

-------------------------------------------------------------- JYOTI ELECTRIC MOTORS LTD Versus COMMISSIONER OF INCOME TAX -------------------------------------------------------------- Appearance: MR HM TALATI for Petitioner - ABSENT MR B.B. NAYAK with MR MANISH R BHATT for Respondent No. 1

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

CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH Date of decision: 17/04/98

ORAL JUDGEMENT (Per R.K.Abichandani,J.)

The Income Tax Appellate Tribunal, Ahmedabad has referred the following question for the opinion of this Court under Section 256(1) of the Income Tax Act, 1961:-

"Whether, on the facts and in the circumstances

of the case, the Tribunal was right in holding that the Commissioner was justified in passing the order under Section 263 of the Act in setting aside the assessment order."

2.

The matter relates to the Assessment Year 1976-77, in which the question cropped up as to whether the assessee company which was doing the business of manufacturing and selling electric motors, was entitled to deduct a sum of Rs. 3,25,927/- as payment of royalty Revenue and set-aside the same with a direction to the ITO to examine the terms of the agreement and decide the matter afresh. The Tribunal in appeal filed by the assessee held that the expenditure in question was prima-facie expenditure of capital nature as held by the Commissioner and therefore, the Commissioner was justified in exercising his juri iction under Section 263 of the Act. The Tribunal made it clear that the ITO after examining the agreement and other material, would be justified in passing any order which he thinks proper on merits.

3.

The assessee's case is that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue and that order of the ITO was in conformity

with the provisions of law and in accordance with the decision of this Court in Jyoti Limited (supra) and therefore, there was no valid ground for the Commissioner to exercise his powers under Section 263 of the Act.

4.

It will be noted from Article 4 of the Licensing Agreement that for the supply of additional design and manufacturing drawings and other information, necessary to disclose any modification and improvements made in the products, the licensor was to be paid by the assessee licensee one half per cent royalty in addition to the royalty mentioned in Article 8 of the agreement. As provided by Article 4A, one set of initial drawings and technical documentation was to be supplied to the licensee free of charge. The duration of agreement as provided under Article 2 was from 1st September, 1972 upto 10th March, 1982 and even after the expiry of agreement, it was to continue in force until terminated by giving one year's notice in writing. It would therefore, prima-facie appear that the assessee had acquired a benefit of enduring nature. As held by Hon'ble the Supreme Court in Jonas Woodhead & Sons (India) Limited V. CIT, reported in 224 ITR 342, the sum -----

*/Mohandas

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