Karnataka High Court
Ravi Machine Tools (P.) Ltd. vs Commissioner Of Income-Tax on 21 April, 1978
Equivalent citations: ILR1978KAR1527, [1978]114ITR459(KAR), [1978]114ITR459(KARN)
JUDGMENT Srinivisa Iyengar, J.
1. The Income-tax Appellate tribunal, Bangalore bench, has referred the following two questions for our decision :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the land purchased by the assessee company was not an assest of the undedrtaking and, therefore, the sum of Rs. 1,01,000 was not entitled to be included in the capital of the undertaking when computing the relief under section 80J ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 80,445 paid to Messrs. Oerlikon Ltd., Switzerland, was capital expenditure and not revenue expenditure ?"
2. The assessee is a private limited company engaged in the manufacture of machine tools. The year of assessment is 1969-70. the assessment resulted in a business loss which was allowed to be carried forward.
3. The reference is at the instance of the assessee. However, the assessee has not been represented by any counsel. When the case came up for hearing we requested Sri G. Sarangan, learned advocate, to act as amicus curiae and argue the matter. He readily consented to do so and he has addressed arguments, which we have found to be of great assistance. Accordingly, we thank him for the assistance that he has rendered.
4. The facts lie in a brief compass. The company purchased a land of about 2 acres 11 gts. situated in the outskirts of Bangalore City for a sum of Rs. 1,65,000 on October 31,1966. One Basavarajappa was the owner of this land, he having purchased it in 1962 for a sum of Rs. 16,000 only. He appears to have been a person who is interested in the company. The Income-tax officer felt that the price paid was disproportionate to the market value. He came to the conlcusion that the fair market value of the property as on the date of purchase would be Rs. 64,000. He did not, howeverr, doubt that the company had parted with the amount of the sale, consideration as had been mentioned in the deed of sale, nor did he come to the conclusion that the transaction was a sham one. However, in computing the benefit to be given under section 80J, he took the value of the capital asset at only Rs. 64,000 and disallowed the relief in respect of the balnace of Rs. 1,01,000. The assesse had entered into an agreement with a swiss company and in terms of the agreement it debited a sum of Rs. 80,445 as payment for technical know-how. The assesse claimed it as a revneu exepnditure allowable under section 37(1) of the Income-tax Act. The Income-tax officer diallowed the claim on the ground that it was capital expenditure following the principle enunciated by this court in Mysore Kirloskar Ltd. v. Commissioner of Income-tax [1968] 67 ITR 23 (Mys).
5. The assessee perferred an appeal to the Appellate Assistant Commissioner, but with no success. A further appeal to the Tribunal also failed. Feeling aggrieved by the decision of the Tribunal, the assessee sought reference to this court and, accordingly, the above questions have been referred to this court.
6. Before the tribunal, the assessee relied upon rule 19A of the Income-tax Rules, 1962, which made provision for the capital employed in an industrial undertaking for the purpose of section 80J and in particular to sub-rule (2) which provided that in the case of assests acquired by purchase and not entitled to depreciation, their actual cost of the assessee has to be taken into account, and that the Income-tax officer had no power to scale down the actual cost. The Tribunal gave a definite finding that the actual cost of the assessee of the capital asset was Rs. 1,65,000. The relevant portion in the order of the tribunal reads as follow :
"The asessee argues that in view of clause (ii) of sub-rule, (2) the authorities below had no power to scale donw the actual cost to the assessee which is Rs. 1,65,000. We also agree that the actual cost to the assessee is Rs. 1,65,000.
7. However, the tribunal agreed with the submission made on behalf of the department that the land had not been built upon and the factory as had been intended had not come up and, therefore, the land had not been used for the purposes of the undertaking and, accordingly, though the land might be an asset of the assessee-company because of its non-user, it cannot be said to be an asset of the undertaking. On this reasoning, the disallowance of a sum of Rs. 1,01,000 was sustained.
8. Section 80J referes to capital employed in an industrial undertaking and not the user of any asset as such. The company acquires an asset for its undertaking and the capital employed in the undrtaking is the amount paid to acquire that asset. the user or non-user of the asests so acquired is immaterial for the computation of the benefit under section 80J. This is the view that was taken by the High Court of Calcutta in Commissioenr of Income-tax v. Indian Oxygen Ltd. [1978] 113 ITR 109, and also [1959] 35 ITR 651 of High Court to Madras (Jayaram Mills Ktd. v. Commissioner of Excess Profits Tax). In Indian Oxygen's case [1978] 113 ITR 109, after referring to the observations of the House of Lords in the case of Birmingham Small Arms Co. Ltd. [1951] 2 All ER 296, it was held - see .
"..... it appears to us that the moment capital is utilised for the purposes of acquiring any asset for a business, such capital becomes employed in the business. Whether the asset itself is actualy used in the business or not, so far as the capital is concerned, it continies to be employed in the business."
9. We entirely agree with this enunciation. The Tribunal was in error in making a distinction between the company or undertaking using or not using the asset. The assessee was entitled to the inclusion of the actual cost of the land in the computation of the benefit under section 80J. Accordingly, we answer the first question in the negative and in favour of the assesse.
10. The expenditue on know-how which was claimed to be revenue expenditure had been incurred purusuant to clauses 6 and 7 of the agreement dated March 25, 1967, between the assessee and the foreign company. Under clause 6, the foreign company agrred to grant such licence as may be required by the assessee for the manufacture in India of certain machines and the improvements thereof. Sub-claused (c) of clause 6 provided that the foreign company shall give all technical information, knowledge, expert advice and assistance concerning the manufacture, assesbly inspection, testing use and maintenance of all products within the field covered by the agreement. The agreement was to be in force for a period of five years. Clause 7 provided for making payments and 20% had to be paid at the time of signing of the agreement and the balance subserquently as detailed therein. The Tribunal as well as authorities below rejected the claim only on the basis of the decision of this court in Mysore Kirloskar Ltd. v. Commissioenr of Income-tax [1968] 67 ITR 23 (Mys). This court has in its judgment in I.T.R.C. Nos. 82 to 85 of 1974 decided on 17-4-1978 in the case of Mysore Kirloskar Ltd. (See page 443 supra), in which identical question for the subsequent years was involved, held on the construction of the agreement therein that the payments were revenue in nature. This court also overruled the decision in Mysore Kirloskar Ltd. v. Commissioenr of Income-tax [1968] 67 ITR 23 (Mys) following the decision of the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd. [1968] 69 ITR 692. Clauses in regard to the payment as well as the other clauses which indicate the purpose and nature of the payment in the instance case are similar to those discussed in I.T.R.C. Nos, 82 to 85 of 1974 (Mysore Kirloskar Ltd v. Commissioner of Income-tax - See page 443 Supra). The expenditure was not in regard to any tangible capital asset as such but to the supply of technical know-how which was to be used in the manufacture of certain products in which the assesse was engaged and this was essentially for the purpose of earning profits during the course of the agreement. Accordingly, the expenditure was clearly revenue in nature and ought to have been allowed. The Tribunal was in error in confirming the rejection of this part of the claim. Question No. 2 is also answered in the negative and in favour of the assessee.
11. There shall be no order as to costs.