Law: Income Tax Act, 1961

Section: 37

Income-tax----Capital or revenue expenditure---General principles --- Purchase of drawings from foreign company in order to manufacture special items for a particular period---No enduring benefit obtained---Travel expenses and expenses on purchase of drawings---Deductible--Indian Income Tax Act, 1961, S. 37. What is capital expenditure and what is revenue are not eternal verities but must be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. The assessee received an order from the Defence Department for supply of certain special types of carburettors. In order to fulfil this contract, the assessee purchased drawings from a company in the U.K. It claimed that the expenditure incurred for the purpose of purchasing the drawings outright and the expenditure incurred by way of travelling expenditure for procuring, the said drawings were deductible. The claim was rejected by the Income-tax Officer. According to the Commissioner of Income-tax Appeals there was no possibility of such orders being repeated in future and in the modern days of day-to-day technological improvements, the designs that were in use at a particular time might not be of use after some years. Therefore, according to the Commissioner of Income-tax Appeals, the acquisition of the information in the form of drawings would not be of a permanent value to the assessee so as to treat such expenditure as capital expenditure. This was confirmed by the Tribunal. On a reference: Held, that though there was an outright purchase, the plan would be useful only up to the period of fulfilling the order placed by the Defence Department. In order to meet the exigencies of the business, the assessee had purchased the drawings. On the facts, both the first Appellate Authority and the Tribunal had come to the conclusion that the expenditure incurred by the assessee for the purchase of…

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