MADRAS INDUSTRIAL LININGS LTD Vs. INCOME-TAX OFFICER

JUDGEMENT

(1.) This is an appeal by the assessee objecting to the order passed by the Commissioner of Income-tax, Tamilnadu-III, Madras, under section 263 of the Income-tax Act, 1961, dated 18-9-1986.

(2.) The assessee is a company engaged in the manufacture and sale of air pollution control equipment. Its income-tax assessment for the assessment year 1982-83, for which the previous year ended on 31-3-1982, was completed by the Income-tax Officer under section 143(3) of the Act by his order dated 29-12-1984. In the said assessment, the Income-tax Officer had allowed the assessees claim that the sum of Rs. 1,13,611 paid by the assessee to M/s. Environmental Elements Corporation, USA, as the second instalment of initial engineering fee, represented revenue expenditure. This was considered to be erroneous and prejudicial to the interests of Revenue by the Commissioner, who was of the view that this payment represented capital expenditure. He, therefore, initiated action under section 263 of the Act and called upon the assessee to show cause against his proposed action to revise the assessment order. After considering the assessees objections, the Commissioner held that under the agreement dated 27-10-1977 the assessee obtained the technical knowhow for manufacture of air pollution control equipments, that a new line of manufacture was stated using the knowhow and that the foreign company continued to use the knowhow was not at-all material, as in the hands of the assessee the purchase enabled them to embark upon a new line of manufacture which was an enduring benefit. The Commissioner, therefore, held that this was purely a capital expenditure and that the Income-tax Officer erred in allowing the same as revenue expenditure and, therefore, the assessment was clearly prejudicial to the interests of Revenue. He, therefore, under the powers vested in him under section 263 of the Act, directed the Income-tax Officer to modify the assessment by treating the expenditure incurred by the assessee for purchase of the knowhow as capital expenditure.

(3.) On the assessees further argument that if the expenditure was treated as capital, depreciation and investment allowance should also be granted, the Commissioner directed the Income-tax Officer to verify whether any capital asset had been brought into existence by the expenditure and if any asset had been brought into existence, after evaluating its cost, proper depreciation and other allowances should be granted in the prescribed particulars were furnished and the other formalities had been complied with.