COMMISSIONER OF INCOME TAX vs. BHARAT SEATS LIMITED

ITA - 1011 / 2007HC Delhi08 October 201020 pages

For Petitioner: PREM LATA BANSAL

AI SummaryDismissed

What did the High Court hold?

The High Court held that the ITAT was justified in its opinion that the payment of ₹63,46,000/- was allowable as revenue expenditure and not as capital expenditure eligible for depreciation under Section 32 of the Income-Tax Act. The Court reasoned that the expenditure was incurred for the modification of existing assets and related to the production process, not for acquiring an asset of enduring nature. The ITAT's observation that the acquired design was not in relation to setting up of plant or machinery but related to the process of manufacturing was accepted. The Court distinguished the present case from the Supreme Court's decision in Southern Switchgears Ltd. by noting that in the latter, the royalty was a lump sum payment, whereas in the present case, royalty was to be paid on the quantity of goods produced. Therefore, the Court concluded that the expenditure was revenue in nature. Both questions of law were answered in favour of the assessee.

What were the facts?

The appeals concern the assessment year 2001-02. The respondent assessee, engaged in manufacturing auto electrical products, is primarily promoted by two Japanese companies, M/s Denso Corporation and M/s Sumitomo Corporation. The assessee filed a return declaring income at ₹14,77,51,457/-. During assessment, the Assessing Officer noted a deposit of ₹371.60 lacs for technical know-how fees and ₹77,03,487/- for know-how taken as part of plant and machinery. The dispute specifically relates to a payment of ₹63,46,000/- made to M/s Denso Corporation, Japan, for the supply of technology to improve existing products. The assessee claimed this as revenue expenditure, while the Assessing Officer treated it as capital expenditure, disallowing it as revenue and allowing only depreciation under Section 32. The CIT(A) upheld the Assessing Officer's view. The ITAT, however, allowed the expenditure as revenue. The Revenue appealed this decision.

What were the issues?

1. Whether the ITAT was justified in law in holding that the amount of ₹63,46,000 paid by the assessee for acquiring technical know-how was allowable as revenue expenditure? (Question of law) 2. Whether expenditure incurred by the assessee for acquisition of technical know-how was a revenue expenditure or a capital expenditure eligible for depreciation under Section 32 of the Income-Tax Act, 1961? (Question of mixed law and fact) Assessee's Arguments: The assessee contended that the payment of ₹63,46,000/- was for the supply of technology for improvement of existing products, which is revenue in nature and allowable as business expenditure. The ITAT accepted this contention, holding that the design acquired was not for setting up plant or machinery but related to the manufacturing process, and did not result in an asset of enduring nature. The ITAT also noted that the provisions of Section 32, amended from April 1, 1998, cannot be extended to treat revenue expenditure as capital expenditure eligible for depreciation. Revenue's Arguments: The Revenue argued that the ITAT failed to consider the effect of the Supreme Court judgment in Southern Switchgears Ltd. v. CIT, where royalty payments were treated as capital expenditure. The Revenue contended that the expenditure was capital in nature and thus eligible for depreciation under Section 32.

Which sections of the Income-tax Act were involved?

Section 32,Section 35AB

AI-generated summary — verify with the full judgment below

2010:DHC:9626-DB

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