Income Tax Appellate Tribunal - Chandigarh
Deputy Commissioner Of Income-Tax vs Metalman Auto (P.) Ltd. on 30 June, 2000
Equivalent citations: [2001]78ITD327(CHD)
ORDER
Joginder Pall, A.M.
1. The Revenue has preferred this appeal against the order of the CIT(A) for the assessment year 1991-92.
2. All the grounds of appeal relate to the issue that the CIT(A) was not justified in deleting the addition of Rs. 4,11.000 made on account of designs and development expenditure being of capital nature. The relevant facts of the case arc that the assessee had debited a sum of Rs. 5,48,000 to the profit and loss account under the head "research and development expenses". The assessee claimed the same as revenue expenditure. In reply to the Assessing Officer's query as to why the impugned expenditure should not be treated as capital expenditure, the assessee submitted that the assessee was manufacturing various automobile components which are used as original equipment by M/s Kinetic Honda Motors Ltd. The assessee had spent this amount for the development of tools to manufacture the same components. It was also submitted that it was a continuous process for alteration in the tools for achieving the maximum output by reducing mechanical processes and for saving in material consumption. The Assessing Officer noted that expenditure incurred on designs and development of tools was a part and parcel of the plant and machinery being used to manufacture the components. Expenditure incurred on designing of these tools would give the assessee benefit of enduring nature and, therefore, the same was treated as capital expenditure. However, the Assessing Officer allowed depreciation of Rs. 1,37,000 thereon at the rate of 33.3 per cent which reduced the impugned addition to Rs. 4,11,000 (5,48,000 - 1,37,000) for the assessment year under appeal.
3. Aggrieved, the assessee took the matter in appeal before the CIT(A). It was submitted before the CIT(A) that as a result of consultation and designs of various tools and processes, the assessee has saved a number of manufacturing processes resulting in increase of manufacturing and sale and profitability. The assessee had cited specific items like side bumper, luggage carrier, side pipe, plate up etc. whereas a result of consultation, maximum saving in regard to processes was made. Relying on the decision of the Jaipur Bench of the IT AT in the case of ITO v. Aravali Swachalit Vahan (P.) Ltd, the CIT(A) held that the impugned expenditure was revenue expenditure. He also referred to the decision of the Andhra Pradesh High Court in CIT v. Praga Tools Ltd [1986] 157 ITR 282, relied on by the ITAT, where the High Court has held that expenditure for development of parts by carrying out certain modification and improvements in the design was not capital in nature. He, therefore, deleted the disallowance. Revenue is aggrieved by the order of the CIT(A) and hence this appeal before us.
4. Before us, Shri Saini, the Id. D.R., submitted that addition was made of Rs. 5,48,000 and not of Rs. 4,11,000. He submitted that amount of Rs. 4,11,000 has been arrived at after allowing depreciation of Rs. 1,37,000 from Rs. 5,48,000. He submitted that payment of Rs. 5,48,000 was made to M/s Kanin (India) Pvt. Ltd. for consultations and obtaining new designs of tools and dyes for the automobile components. He submitted that the CIT(A) has deleted the addition by relying on the decision of the Jaipur Bench of the ITAT in the case of Aravali Swachalit Vahan (P.) Ltd. (supra) wherein reliance was also placed on the judgment of the AP High Court in the case of Praga Tools Ltd. (supra). He submitted that in the case before the AP High Court, the assessee had not obtained benefit of enduring nature. But in this case, he submitted that the assessee has obtained benefit of enduring nature. He also submitted that the expenditure incurred was related to re-designing of tools and dyes which formed part of the capital asset and, therefore, the same is capital expenditure. He also submitted that the expenditure incurred on technical know-how is a capital expenditure in view of the Supreme Court judgment in the case of Jonas Woodhead & Sons (India) Ltd, v. CIT [1997] 224 ITR 342. He also relied on the Supreme Court judgment in Arvind Mills Ltd. v. CIT [1992] 197 ITR 422: where the Hon'ble Supreme Court has held that capital expenditure does not lose its character. He also relied on the decision of the Supreme Court in the case of CIT v. Ashok Leyland Ltd [1972] 86 ITR 549 to support his contention that in a case where expenditure results in enduring benefit to the assessee, the expenditure would fall in the category of capital. He also relied on the judgment in Hinton (Inspector of Taxes) v. Maden & Ireland Ltd. [1960] 39 ITR 357 (HL) where expenditure on the replacement of knives etc. was considered to be capital expenditure. Further he relied on the decisions in CIT v. Noroth Oil Mill Co. Ltd. [1983] 140 ITR 173 (Ker.) and CIT v. Shri Digvijay Cement Co. Ltd. [1986] 159 ITR 253 (Guj.) and the decision of the Calcutta High Court in CIT v. Hindusthan Pilkington Glass Works Ltd. [1994] 73 Taxman 631 where expenditure incurred on fabrication of sheet glass furnace was held to be a capital expenditure. He also relied on the judgment in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC). He also made an alternate submission that if the expenditure has been incurred through outside agency, the expenditure is allowable only if the same is incurred exclusively for the assessee. For this proposition, he relied on two judgments in CITv. Ciba of India Ltd, [1968] 69 ITR 692 (SC) and Indian Telephone Industries Ltd. v. CIT [1979] 117 ITR 682 (Kar.). In the light of these facts, he pleaded that the order of the CIT(A) may be set aside and that of the Assessing Officer be restored.
5. The ld. Counsel for the assessee submitted that the assessee was already in the business of manufacture of automobile components. The impugned expenditure was incurred on research and development with a view to improving the quality of components already being manufac-
tured and to reduce the cost of raw-material. He also submitted that the assessee owns a lab at its work place which is being utilised for carrying on research and development. The purpose of incurring such expenditure was to make use of the same at assessee's own work place. He submitted that the fact that the assessee had incurred such expenditure on research and development has never been disputed by the revenue. Relying on the decision in the case of ITO v. Polychem Ltd. [1984] 17 TTJ 155, the ld Counsel for the assessee submitted that expenditure incurred in acquiring technical know-how relating to the process of manufacture of end product was held to be allowable. He also relied on the decision of Jaipur Bench of the IT AT in the case of Aravali Swachalit Vahan (P.) Ltd. (supra) where expenditure incurred for developing parts of scooter and correcting designs for manufacture of scooter was held to be a revenue expenditure. He submitted that expenditure incurred by the assessee has to be viewed in the light of rapid technological and scientific developments which are taking place in the modern world. He submitted that changes in this field are so fast that one has to keep oneself up to date to keep pace with these changes. The ld. counsel for the assessee also submitted that this expenditure was allowable under section 35AB of the Act as the expenditure incurred was on know-how.
6. Replying to the submissions made by the ld. Counsel for the assessee, the ld. D.R. submitted that the assessee had never claimed the deduction under section 35AB of the Act. He submitted that assessee had claimed such expenditure under section 37 of the Act. He also submitted that the assessee had not capitalised its expenditure and claimed the deduction under section 35(2) of the Act. He also submitted that the decision relied on by the ld. Counsel for the assessee in the case of Polychem Ltd. (supra) was not applicable to the facts of the case as the same related to deduction under section 35 on scientific research. He stated that if the assessee wanted to claim deduction under section 35, there was no need on its part to claim the same as revenue expenditure. In that case, the assessee should have capitalised the expenditure and claimed 1/3rd of deduction as provided under section 35AB.
7. The ld. Counsel for the assessee made a request that through oversight, he could not reply to the points made by the ld D.R. by relying on two decisions of the Supreme Court in the cases in Ciba of India Ltd. (supra) and Indian Telephone Industries Ltd. (supra). He submitted that these judgments did not apply to the provisions of section 35AB as these provisions had not come into being at the relevant time. He also submitted that whether the assessee has acquired enduring benefit by way of incurring such expenditure or not, has been answered by the Hon'ble Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468. He submitted that page number of the ITR will be given later on. He also submitted that the Hon'ble Supreme Court has in the case of National Thermal Power Co. Ltd v. CIT [1998] 229 ITR 383 has held that additional plea could be raised before the appellate authority at any point of time if it related to the question of law arising from facts which are on record in the assessment proceedings. He, therefore, submitted that expenditure incurred by the assessee is allowable under section 35AB of the Act. Subsequently the ld Counsel for the assessee furnished the page of the judgment of the Supreme Court in the case of Madras Auto Service (P.) Ltd. (supra). Further he also added the judgment of the Delhi High Court in CIT v. Goodyear India Ltd. [2000] 243 ITR 239. This judgment was not cited at the bar. Therefore, we do not consider it proper to take judicial notice of the same as the opposite party had no opportunity to make submissions thereon.
8. We have carefully considered the rival submissions. We have examined the facts, evidence and material on record. We have also perused the orders of the authorities below and also referred to the various decisions relied on by both the parties. Now the first issue that needs to be addressed is whether expenditure incurred by the assessee is allowable under section 37 of the Act. The facts placed on record show that the assessee had debited the expenditure to the profit and loss account and claimed deduction of the same under section 37 of the Act. The submissions of the assessee, both before the Assessing Officer and the CIT(A) was that the expenditure was allowable as revenue expenditure under section 37 of the Act. The assessee had neither claimed deduction under section 35AB nor such plea was ever raised before the authorities below. The facts of the case clearly show that the assessee was already in the business of manufacturing automobile components. The expenditure was incurred on the designs and development of tools to bring improvement in the components already manufactured by the assessee. It is also to be noted that by incurring such expenditure, the assessee never intended to set up a new unit or to manufacture altogether a new product not in the line of existing business of the assessee. Now the question is whether the expenditure incurred for improving the quality of items already manufactured constitutes a capital expenditure. As stated earlier, the CIT(A) has allowed the appeal in favour of the assessee by relying on the decision of the Jaipur Bench of the ITAT in the case of Aravali Swachalit Vahan (P.) Ltd. (supra) where the expenditure incurred for developing parts of scooter and correcting designs for manufacture of scooter was held to be revenue expenditure by the ITAT. While deciding the appeal in favour of the assessee, the ITAT has held that by incurring such expenditure, the assessee had only carried out modification and improvements in the existing designs. This case falls in the same category as that of the assessee. Here also, the assessee has carried out improvements in the items/ components already manufactured by it. The assessee has neither set up a new unit nor incurred such expenditure for manufacturing items not in the line of business of the assessee. While deciding this case, the ITAT Jaipur Bench had also relied on the judgment of the AP High Court in the case of Praga Tools Ltd. (supra), where the expenditure incurred for obtaining consultancy to improve quality of products was held to be revenue expenditure and the High Court also held that it was not for acquiring an asset of an enduring nature.
9. The Revenue's case is that by incurring such expenditure the assessee had obtained enduring benefit. Now the question that requires to be addressed is what is the meaning of 'acquiring a benefit of enduring nature'. Their Lordships of the House of Lords in the case of Hinton (Inspector of Taxes) (supra) has observed as under :--
"There is no principle of accountancy or law which requires that the expenditure which is charged to P&L a/c should get exhausted in the same year. Expenditure on all consumable used in industry does not always mean that the fallout by way of benefit would not overstep the accounting year. For that reason, it cannot be said that it is not chargeable against revenue of the year. An example of this category of expenditure is repairs to premises and machinery where the benefit certainly overruns the year."
Further in the case of Empire Jute Co. Ltd v. CIT [1980] 124 ITR 1, the Hon'ble Supreme Court has held as under :--
"There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may nevertheless, be on revenue account and the test of enduring benefit, may break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of the above test- If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future."
Thus from the above it is clear that benefit derived from the expenditure may run more than one year but that does not mean that the expenditure is capital expenditure. The deciding factor is whether the expenditure incurred for obtaining advantage of enduring benefit relates to capital field and if it does not relate to capital field, the expenditure would be revenue expenditure. In the case of Madras Auto Service (P.) Ltd. (supra) relied on by the ld Counsel for the assessee, the assessee had taken premises on lease for a period of 39 years. The assessee had demolished the old building and constructed a new building on its own expenses. The building did not belong to the assessee, rather the assessee was to use the same for the period of 39 years on a very low rent. Having regard to these facts, the Hon'ble Supreme Court has held that the assessee did not acquire a capital asset but had obtained only a business advantage and, therefore, the expenditure was allowable as revenue expenditure. While deciding this case, the Hon'ble Apex Court has held that expenditure is deemed to be capital when it is made for the initiation of a business, for extension of a business or for a substantial replacement of equipment. Expenditure may be treated as attributable to capital when it is made not only once and for all but may be due to bringing into existence an asset or an advantage for the enduring benefit of a trade. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in capital asset, then that puts the business on another footing. Thus in the case before the Supreme Court, the assessee by incurring expenditure on construction of new building on the premises taken on lease, the benefit was to run for 39 years but still it was held to be revenue expenditure because by incurring such expenditure, the assessee had not acquired any capital asset. Thus in the light of these facts, the deciding factor as to whether the assessee has derived benefit of enduring nature or not is not number of years for which the benefit is to run but is the fact whether by incurring such expenditure the assessee has acquired any capital asset. The issue whether the assessee has acquired a benefit of enduring nature or not is to be seen in the light of rapid technological and scientific developments which are taking place in the modern day world. In view of these changes, the benefit may be short lived and it did not fall in the category of enduring benefit. Judicial authorities have also accepted these developments as is obvious from the judgment of the Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377, where the Hon'ble Apex Court has held as under:--
"That the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the appellant's established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day to day business of the appellant's established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant."
It was further observed by the Hon'ble Apex Court as under :-
"It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerally to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holding an outlay, such as this, as capital."
10. The Hon'ble Bombay High Court in the case of Bajaj Tempo Ltd. v. CIT [1994] 207 1TR 1017' considered the various judgments of the Hon'ble Supreme Court. After considering the various judgments, the Bombay High Court recorded the following findings at pages 1028 to 1029 :--
"We arc unable to accept that this proposition applies the assessee's case. This is so, because we are unable to read the assessee's agreement with the German company as an agreement the predominant purpose of which was to render mere documentation service. As pointed in Kirloskar Pneumatic's case [1982] 136 ITR 746 (Born.), it is not possible to scan a contract in bits and pieces to determine its nature, nor by referring to a particular clause. As we read the agreement of the assessee with the German company, the predominant object of the agreement was to render technical know-how to the assessee. In relation to the main purpose, one of the incidental objects was to transfer the designs, data sheets and such other technical documents. We are unable to accept the argument of Mr. Jetley that the agreement in question, When read in its entirety, should be held to be an agreement mainly for the purpose of supply of documents. When the true purpose of the agreement is discovered there is no difficulty in applying the ratio of the judgments of this Court in Telco's case [1980] 123 ITR 538 (Bom.) and Kirloskar Pneumatic's case [1982] 136 ITR 746 (Bom.) to the assessee's case. We are of the view that the agreement was predominantly an agreement forpurchase of technical knowledge or information. By expending money thereon, the assessee can neither be said to have brought into existence any asset, or at any rate an asset of an enduring nature. We cannot lose sight of the observations of the Supreme Court made in Ciba's case [1968] 69 ITR 692 and Alemfeic's case [1989] 177 ITR 377 (SC) that in these days of fast changing world of technology, the frontiers of scientific and technical knowledge shift rapidly, and what is current today may become obsolete in no time. The thread of reasoning which runs from Ciba 's case [1968] 69 ITR 692 (SC) to Alembic's case[1989] 177 ITR377(SC) and through the several judgments of our High Courts noticed by us, supports the view that the state-of-the-art technology of modern times can neither be deemed to be permanent nor of an enduring nature, so as to satisfy the "enduring asset" test."
Thus the fact whether the assessee has acquired benefit of enduring nature or not is to be viewed in the light of changes that are taking place in the technological field. What may appear to be a benefit to last for a longer period may not be so because the technology becomes obsolete in a short span of time. What one has to see is whether by incurring such expenditure, the assessee has obtained benefit relating to capital asset. If the expenditure incurred results in improving the existing product already manufactured by the assessee and does not relate to setting up of altogether a new product or for setting up a new unit, the expenditure incurred would be revenue in nature.
11. Now we turn to the decisions relied on by the ld D.R. to see how far these support the case of the Revenue.
(i) The ld. D.R. has relied on the judgment of the Supreme Court in the case of Arvind Mills Ltd. (supra), where the Apex Court has held that betterment charges paid by the assessee to effect improvements on lands within a scheme such as laying of roads and drainages, which ultimately resulted in increasing value of capital asset of the assessee, the expenditure was held to be capital in nature. In this case, there is nothing to suggest that expenditure was incurred resulting in increasing the value of capital asset. It only resulted in improving the quality of the existing product already manufactured by the assessee.
(ii) In the case of Ashok Leyland Ltd. (supra), the assessee had paid compensation to managing agents for dropping assembly of motor car as the assessee had started new business of manufacturing of trucks. Owing to this, continuance of managing agency became surplus and, therefore, the assessee paid compensation for termination of the services of the managing agents. In the light of these facts, the Supreme Court held that compensation paid for termination of the services of the managing agents was with a view tosave business expenditure in the accounting period as well as a few subsequent years, it was not made for acquiring any enduring benefit or income yielding asset. Therefore, the expenditure was of a revenue nature and was an allowable deduction in computing the profits of the assessee-company. The facts of that case are clearly distinguishable from the present case. The assessee had not paid any compensation and, therefore, this does not support the case of the Revenue.
(iii) In the case of Hinton (Inspector of Taxes) (supra), expenditure incurred on the replacement of knives was held to be capital expenditure because the knives constituted "plant". In the case under consideration, the assessee has not incurred the expenditure for replacement of capital asset and, therefore, this judgment is also not applicable to the facts of this case.
(iv) In the case of Noroth Oil Mill Co. Ltd. (supra), the expenditure incurred on replacement of engines after four years with engines of higher horse power was held to be capital expenditure by the Kerala High Court on the ground that renewal resulted in enduring advantage. Admittedly, in this case, replacement related to engines of higher horse power, which was capital asset but in the case before us, the expenditure incurred relates to modification of the existing components of automobile, processes resulting in greater efficiency and economy. Such expenditure does not relate to replacement of the assets and hence this judgment is also not applicable to the facts of this case.
(v) The next case relied on by the ld. D.R. is of Gujarat High Court in the case of Digvijay Cement Co. Ltd. (supra). In that case, the assessee was manufacturing cement. Expenditure was incurred in obtaining feasibility report for setting up shipyard, which was altogether a new business. Report was not favourable and shipyard was not set up. In the light of these facts, the Gujarat High Court held that the object of expenditure was to bring into existence asset or advantage of enduring nature and, therefore, the same was capital expenditure. In this case, the expenditure related to the existing business. Therefore, the same could not be held to relate to capital asset. Hence the judgment is not applicable to the facts of this case.
(vi) The ld. D.R. had referred to the judgment of the Calcutta High Court in Hindusthan Pilkington Glass Works Ltd (supra), In that case, expenditure was incurred on reconstruction of sheet glass furnace which was a capital asset. The same was held to be a capital expenditure because it related to a capital asset. This situation is not before us in the present case.
(vii) The ld. D.R. has referred to the judgment of the Supreme Court in the case of Assam Bengal Cement Co. Ltd. (supra). In that case, the assessee had paid compensation to lessor to prevent lessor for granting similar rights of lime stone quarries. The expenditure was incurred to prevent trading competition for the manufacture of cement. In the light of these facts, the Hon'ble Apex Court held that consideration was paid with a view to prevent trading competition in the neighbouring quarries so that the assessee could enjoy monopoly rights. This was held to be capital expenditure because the assessee derived benefit of enduring nature. The nature of expenditure incurred in this case is different and, therefore, the case is distinguishable from the facts of the present case.
(viii) In the case of Ciba of India Ltd. (supra), the facts before the Hon'ble Supreme Court were that the assessee had entered into an agreement with foreign company for specified period for use of processes, scientific data, patents and trade marks for which the assessee agreed to contribute to a foreign company of a percentage of sale price of products towards technical services, research work, cost of material used in research and royalties. It may be noted that in this case, the foreign company granted to the assessee full and sole right and licence under the patent listed in the agreement to make, use, exercise and vend the inventions specified therein in India and also a licence to use certain specified trade marks in the territory subject to any existing licence which third parties held at the date of agreement. In these circumstances, the expenditure was held to be of capital nature as the same was spent on scientific research. However, the contribution made was held to be allowable as business expenditure on the ground that it had merely allowed access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded. As such the assessee was merely a licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade mark of that company. It did not make the assessee owner of these assets. It was held that the assessee did not acquire any asset or advantage of an enduring nature for the benefit of the business. Ultimately, the expenditure was held to be allowable. Even this case is of no help to the Revenue as ultimately the expenditure was held to be of revenue nature. In this case, there is no evidence that consultancy services and technical information and data provided to the assessee for modification of the existing business was meant for the exclusive use of the assessee. In other words, there is no evidence brought on record to show that by virtue of such data, the assessee became exclusive owner of the same. Therefore, the facts of this case are also different.
\(ix) The last case relied on by the ld. D.R. is of Karnataka High Court in the case of Indian Telephone Industries Ltd. (supra). In this case, the foreign company provided finance to set up factory for manufacture of special switching equipment for telephone exchange and also for providing technical information and know-how. Agreement was to be in force for a period of 7 years. Indian company had no right to part with know-how in favour of third party. The High Court observed that technical know-how is subject to speedy obsolescence due to rapid research and development in the field of telecommunication. In the light of these facts, the High Court held that amount paid by Indian company was to improve prospects of its own business instead of itself spending on research and development. The assessee had not acquired any asset of enduring nature and, therefore, royalty paid for technical know-how was held to be as business expenditure. This case also supports the case of the assessee rather than supporting the case of the revenue. Thus none of the cases relied on by the ld. D.R. supports the case of the Revenue as the facts of the present case are clearly distinguishable from the facts of those cases.
12. Now the last issue that needs to be considered is whether the expenditure could be allowed under section 35AB. It was the contention of the ld Counsel for the assessee that there being specific section in the Act, expenditure incurred should be allowed under section 35AB. For this purpose, it would be relevant to refer to the memorandum explaining the purpose of provisions of section 35AB inserted by the Finance Bill, 1985 as published in 152 ITR 155 (Statutes) which is as under :--
"44. Deduction in respect of expenditure on know-how. It is proposed to insert a new section 35 AB in the Income-tax Act to provide that any lump sum consideration paid by a taxpayer for acquiring any know-how for use for the purposes of his business will be allowed as deduction by spreading it equally over six years, namely, the year in which the lump sum consideration is paid and the five immediately succeeding years. Where the know-how is developed in a laboratory, university or institution referred to in sub-section (2B) of section 32A, the consideration shall be spread equally over three years."
Now in this case, the assessee had not claimed deduction under section 35AB. The assessee had claimed the entire expenditure as revenue. In fact, neither before the Assessing Officer nor before the CIT(A) the assessee had claimed that deduction should be allowed under section 35AB. Such plea was raised only before us. In the case of Wellman Incandescent India Lid v. Dy. CIT [1995] 55ITD 338, the Calcutta Bench of the ITAT has held as under:--
"Prior to introduction of section 35AB, the consideration paid for acquiring any know-how for the purpose of business was held to be capital expenditure, not allowable as deduction under section 37(1). The consensus of judicial opinion was that expenditure for acquiring the technical know-how was different from expenditure incurred for obtaining the mere use of the technical know-how and information, which was allowable as revenue expenditure. Thus prior to the introduction of section 35AB, the law was that payments for acquisition of the technical know-how or information would be capital payments and payments for the mere use of such know-how during the currency of the agreement were revenue payments, deductible while computing the business income. Having regard to the state of law which existed prior to the introduction of section 35AB it must be construed that the Legislature wanted to provide for writing off of even payments made for the acquisition of technical know-how despite the fact that the judicial interpretation was not in favour of such view. The write off was however, to be spread over a period of six assessment years. The only condition imposed by section 35 AB is that the consideration for acquiring the know-how should be acquired for use for the purpose of the assessee's business.
The assessee's right to have the payments made for obtaining the use of the technical know-how allowed as revenue expenditure remains unaffected by the new section 35AB.
Section 35AB comes into play only when the consideration is paid for acquiring the know-how."
Thus in this case, it was held that the assessee's right to have deduction in respect of payments made for obtaining the use of technical know-how allowable as revenue expenditure under section 37 remains unaffected by new section 35AB introduced w.e.f. assessment year 1986-87. Section 35AB is enabling section and not disabling from descriptive one and, therefore, it could be applicable to that consideration paid for acquiring technical know-how which would otherwise be disallowable as being on capital account. In the case under consideration, there is no material on record to show that the expenditure incurred by the assessee was for acquiring the technical know-how. It was incurred for obtaining and updating the mere use of the technical know-how and information, which was already available with the assessee. Therefore, the expenditure incurred by the assessee would not fall in the category of capital expenditure. The provisions of section 35AB would be applicable only if the expenditure is held to be of capital nature. Therefore, we do not agree with the ld Counsel for the assessee that deduction under section 35AB is to be allowed in this case.
13. In the light of detailed discussion in the preceding paragraphs, we hold that expenditure incurred by the assessee by way of consultancy charges and research and development expenses for modification of the existing automobile components does not relate to capital field. By incurring such expenditure, the assessee has only effected economy and efficiency in manufacturing the existing items. The expenditure does not relate to altogether a new business or for setting up a new line of business or expansion of the existing business. By incurring such expenditure the assessee has only obtained business advantage.
Moreover, the benefit acquired by the assessee is not of enduring nature to put the impugned expenditure in the category of capital in nature. The assessee has not acquired any capital asset in the nature of exclusive user of technical information. It is in the nature of up-dating the existing information already available with the assessee. Therefore, the expenditure incurred by the assessee is of revenue nature and is allowable under section 37 of the Act. Having regard to these facts and circumstances of the case, we confirm the order of the CIT(A) and dismiss the Revenue's appeal.
14. In the result, the appeal is dismissed.