Madhya Pradesh High Court
Electro Medicals vs Commissioner Of Income-Tax on 18 July, 1986
Equivalent citations: [1987]163ITR807(MP)
JUDGMENT Sohani, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act".), the Income-tax Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the sum of Rs. 5,000 claimed by the assessee as development expenditure was rightly treated as a capital expenditure ?"
2. The material facts giving rise to this reference, briefly, are as follows :
The assessee is a registered firm engaged in the business of manufacture of scientific instruments. The assessment year in question is 1975-76. Before the Income-tax Officer, the assessee claimed that the expenditure of Rs. 5,000 incurred by the assessee on account of payment to the National Research Development Corporation in pursuance of an agreement entered into by the assessee with the aforesaid Corporation be allowed as the expenditure was not in the nature of capital expenditure. The Income-tax Officer found that the amount was paid by the assessee to the corporation in consideration of the right to use an invention made by the said corporation in the manufacture of certain items. The Income-tax Officer held that the payment of Rs. 5,000 by the assessee to the aforesaid corporation during the assessment year in question was in the nature of capital expenditure. The Income-tax Officer, therefore, disallowed the claim of the assessee in that behalf. The appeal preferred by the assessee before the Appellate Assistant Commissioner was dismissed. The assessee thereupon filed a second appeal before the Tribunal, which was also dismissed Hence, at the instance of the assessee, the Tribunal has referred the aforesaid question of law to this court for its opinion.
3. In CIT v. Ciba of India Ltd. [1968] 69 ITR 692, the Supreme Court held that payments made for the right to have access to the technical knowledge and the fruits of continuing research and experience of a foreign company are on revenue account. In the instant case, it has been found that the payment was for supply of know-how by the assessee who was already carrying on the business in question. In this connection, we may usefully refer to the following observations in CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. [1980] 123 ITR 538 (Bom) (at page 550) :
"It is not possible for us to accept the argument that merely because a company, which has entered into a contract with regard to know-how, is entitled to use that know-how even after the agreement has expired, the benefit must be said to be of an enduring character. Agreement of foreign collaboration where foreign know-how is availed of in lieu of payment is, in our view, in substance, a transaction of acquiring the necessary technical information with regard to technique of production. Instead of employing persons having knowledge of those techniques and utilising their knowledge, what is done is that technical know-how is acquired under a collaboration agreement. The fact that the same information is continuously used whether in the same form or in an improved form will, therefore, not be relevant in deciding whether technical know-how obtained under such an agreement is a capital asset. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent. There is no property right in a know-how which can be transferred just as it is, in a limited sense, in a patent. In any case, a party making the know-how available can hardly make any attempt to retrieve all the information supplied after the other party to the agreement has fully equipped itself and made itself familiar with the technical information and know-how supplied. The fact that the production can still be continued after the expiry of the agreement is, therefore, in our view, wholly immaterial for deciding whether such know-how can be treated as a capital asset."
4. We respectfully agree with the aforesaid observations. As observed in The Law and Practice of Income Tax by Kanga and Palkhivala (Supplement to seventh edition) at page 90, that in the present day conditions of rapid scientific development, technical know-how which changes fast cannot be treated as a capital asset ; and that even where technical know-how is a capital asset, amounts paid for its use are allowable as revenue expenditure. The Tribunal, in our opinion, erred in holding that the Income-tax Officer rightly held that the sum of Rs. 5,000 claimed by the assessee was capital expenditure.
5. Our answer to the question referred to this court, is, therefore, in the negative and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.