Law:

Section:

Section 37(1) of the income-tax act, 1961-Capital or revenue expenditure-Assessee-company entered into a collaboration agreement with a foreign company for a period of five years under which foreign company provided it know-how for manufacture of certain new items and also in respect of certain items it was already manufacturing-Whether payment for know-how relating to items already being manufactured by assessee was a revenue expenditure-Held, on facts, yes Section 43(3) of the income-tax act, 1961-Plant-Whether know-how in form of printed literature giving technical information constitutes 'plant'-held, yes Facts The assessee-company, manufacturing organic and inorganic pigments, entered into a certain technical know-how agreement for a period of 5 years with a foreign company under which the foreign company agreed to give technical know-how in respect of items being manufactured by the assessee as well as certain items proposed to be manufactured by the assessee. The assessee made a lump sum payment in the form of fully paid-up equity shares in the assessee-company, issued in favour of the foreign company as a consideration for the provision of know-how. The ITO disallowed the assessee's claim for the deduction of the impugned payment holding that the payment was of capital nature. On appeal the AAC allowed the assessee's claim. On appeal by the revenue the Tribunal held that the part of the payment relating to the new line of activity which the assessee was going to start was capital in nature while the other part of the payment was revenue in nature. It also held that the technical know-how, expenditure in respect of which was held to be capital expenditure was covered by the expression 'plant' and that the assessee was entitled to depreciation thereon as. was admissible in the case of 'plant'. On reference, the revenue contended (i) that the payment made for technical know-how in respect of items already being manufactured by the assessee was also capital in nature, and (ii) that the technical know-how relating to the proposed new line of the assessee's activity was not covered by the definition of the word 'plant' given in section 43(3). Held It is now…

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