Law:

Section:

Section 32 of the Income-tax Act, 1961 – Depreciation - Allowance/Rate of – Assessment year 1969-70 – Whether while allowing depreciation, basic facts which Tribunal must find are not that expenditure incurred on acquisition of technical know-how is capital expenditure which as such is entitled to earn depreciation but that this asset fulfils its function as plant in assessee's trading activity by being a tool of tax payer's trade and secondly that it was owned by assessee and was used for purposes of business or profession - Held, yes – Whether, however, where though findings of Tribunal were not clear but it was admitted that technical know-how in question formed tool of trade and so assessee satisfied test of plant, and that said plant was owned and utilized by assessee for business purpose, assessee was entitled to depreciation on expenditure incurred for technical know-how - Held, yes FACTS The assessee entered into an agreement with the owner of technical formula for the manufacture of high vacuum transfer foils. The assessee agreed to pay her Rs. 51,000 as consideration in instalments. Out of said amount Rs. 21,000 paid earlier were treated as capital expenditure but Rs. 15,000 paid in relevant year was claimed by the assessee as revenue expenditure but the ITO disallowed it again treating it as capital expenditure. The AAC noted that the terms of agreement clearly indicated that the payment in question for the purchase and utilization of the technical know-how and was not dependent upon or related to the return on the use of capital know-how, accordingly, held that the said payment was in the nature of capital expenditure, and section 35A also did not apply and thus he confirmed the disallowance. The AAC, however, held that as no capital asset had been brought into existence, depreciation could not be allowed. On appeal, the Tribunal following the decision in the case of CIT v. Elecon Engg. Co. [1974] 96 ITR 672 (Guj.), held that the payment in question was clearly capital expenditure and the assessee was entitled to depreciation on the same. On reference : HELD The Tribunal had proceeded on the assumption that according to the guidance given by the…

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