Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1966-67 - Under agreement with foreign company, assessee obtained right to use know-how and data forever in future - Assessee paid certain amount to foreign company immediately and in addition certain royalty was to be paid for next five years - Whether as per terms of agreements, this was case of acquisition and not merely user for limited period and, therefore, royalty paid by assessee constituted an item of capital expenditure - Held, yes FACTS The assessee firm carrying on business, inter alia, in the manufacture and sale of saccharine, entered into an agreement with the foreign company, under which the foreign company was to transmit to the assessee know-how and data for construction and operation of a plant for the manufacture of saccharine by flow-sheet process. For cession of the know-how and data, the assessee was to pay to the foreign company a lump sum amount immediately and in addition for the next five years, a royalty at certain rate on the sale value of the manufactured products. The agreement further provided that know-how and the data was transferred to the assessee for being used by it in future without any limit of time. The only restriction placed upon the assessee's right to use it was that it could not transfer it to anyone else, and that it had to keep it secret. During the relevant assessment year, the assessee paid certain amount as royalty. It claimed deduction of royalty on the ground that it was a revenue expenditure. This was disallowed, and, the disallowance was affirmed in appeal by the Tribunal holding that the payment was of a capital nature. On reference : HELD It was evident that the assessee acquired ownership of the know-how and the data. It was not merely entitled to use it only so long as it continued to pay the royalty. This was a case, of acquisition and not merely user for a limited time. The assessee clearly obtained an advantage of an enduring nature. The payment for its acquisition was clearly capital in nature. Hence, the royalty paid by the assessee, constituted an item of capital expenditure. Note: The case was…

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