Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2001-02 - Assessee was engaged in manufacturing and sale of auto-electrical products such as starters, alternators, wiper motors, CDI, magnetos, etc., for two and four wheelers - It was manufacturing said products for its Indian clients - For manufacturing said items, it had obtained technical know-how from a Japanese company and payment for acquiring that technology was capitalized - However, whenever there was a change in model or design manufactured by Indian clients of assessee, it was required to suitably modify its design to enable it to manufacture those items in accordance with modified design of automobile and for that purpose, it had made further payments to Japanese company for supply of technology for improvement of its existing products - Whether such payment made by assessee was allowable as a revenue expenditure and not as a capital expenditure because it was expended only for modification of an asset already acquired by it - Held, yes FACTS The assessee was engaged in the manufacturing and sale of auto-electrical products such as starters, alternators, wiper motors, CDI, magnetos, etc., for two and four wheelers. During the relevant assessment year, it had paid substantial amount for acquiring know-how from a Japanese company. Said amount was treated by the assessee itself as a capital expenditure. In addition, it had also made payments to the said Japanese company for supply of technology for improvement of its existing products and had claimed said expense as a business expenditure. The Assessing Officer, however, treated such expenditure as capital in nature and held that only depreciation under section 32 would be allowed thereupon. On appeal, the Commissioner(Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal held that the amount paid by the assessee for supply of technology for improvement of its products was to be allowed as a revenue expenditure. It observed that the design acquired by the assessee was not in relation to setting up of the plant or machinery but related to the process of manufacturing…

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