Law:

Section:

I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessee entered into collaboration agreement with a foreign company which provided for payment of royalties by assessee in consideration of supply of specifications, formulae and other technical information by foreign company for carrying on production in assessee's factory - Whether no part of royalties could be held to partake of nature of capital expenditure, even on footing that technical information purveyed by foreign company tended to be of lasting benefit to assessee - Held, yes - Whether, therefore, entire payment of royalties made by assessee was revenue expenditure entitled to deduction - Held, yes II. Section 80I of the Income-tax Act, 1961 - Deduction - Profit and gains from industrial undertaking after certain dates - Whether items like unabsorbed depreciation and unabsorbed development rebate of past years must be deducted in arriving at figure which would be exigible to deduction at prescribed percentage under section 80-I - Held, yes FACTS I Under collaboration with a foreign company, the assessee set up an automobile tyre manufacturing unit. The collaboration agreement provided for payment by the assessee to the foreign collaborator royalties for the supply by it of specifications, formulae and other technical information for carrying on production in the factory. The ITO disallowed 25 per cent of the fees paid to foreign company on the score that it represented capital expenditure. The Tribunal differed from the ITO's view and allowed the entire payment of the royalties as a revenue deduction. On reference: HELD I Having regard to the terms of the collaboration agreement and to the nature and object of the payment made by the assessee to the foreign company, no part of the royalties could be held to partake of the nature of capital expenditure, even on the footing that the technical information purveyed by the foreign company for running the tyre factory tended to be of lasting benefit to the assessee. The Tribunal was right in law in holding that the entire payment of royalties made by the assessee-company to its collaborator was revenue expenditure and,…

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