Law: Income Tax Act, 1961

Section: 37

(a) Income-tax---Capital or revenue expenditure---General principles---Amount paid by way of technical fees---Revenue expenditure---Indian Income Tax Act, 1961, S.37. In determining whether a particular expenditure is revenue or capital, what is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to business realities. In a given case, the test of "enduring benefit." might break down. The idea of "once for all payment" and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial "fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. It would be unrealistic to ignore the rapid advances in research and to attribute a degree of endurability and permanence to technical know ¬how at any particular stage in this fast-changing area of science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to bear the element of the requisite degree of durability to share the requirement and qualifications of an enduring capital asset. The assessee-company carried on the business of manufacturing and selling of air compressors, pneumatic tools, etc. In the assessments for the assessment years 1970-71, 1971-72 and 1973-74, it claimed the technical fees paid to W of. U.K. and cost of drawings paid to T of U.S.A. as revenue expenditure. The Income-tax Officer disallowed the claim. On appeal, the Appellate Assistant Commissioner allowed it in part. On second appeal, the Tribunal allowed it in full. For the assessment year 1970-71, the assessee also claimed as a revenue expenditure the costs of drawings paid to H. This claim was also disallowed by the Income-tax Officer. The disallowance was upheld by the Appellate Assistant Commissioner. However, on second appeal, the Tribunal allowed the claim. In the assessment for the assessment year 1973-74, the assessee made a claim for depreciation on capital assets used for scientific research related…

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