IMPORTANT POINT
Value of shares allotted by the Company towards reimbursement of technical know-how to the promoter of the company cannot be treated as revenue expenditure u/s 37(1) of the Income tax Act.

JUDGMENT

Syed Shah Mohammed Quadri, J.-The judgment and order passed by the Division Bench of the High Court of Madras in T.C. Nos. 1224 and 1225 of 1977 dated January 17, 1983 is subject-matter of challenge in these appeals.

2. The appellant-assessee is a company registered under the Indian Companies Act. It was incorporated in the year 1965. Two companies M/s. Eimco Corporation Inc. (for short Eimco"), an American company, and M/s. K.C.P. Ltd. (for short KCP ), an Indian Company, promoted the appellant company. The authorised capital of the appellant was Rs. 10,000,000 consisting of 1,000,00 equity shares of Rs.10/- each. Each of them agreed to subscribe Rs. 4,70,000/- out of which each will have to pay initially a sum of Rs. 2,80,000/- towards its contribution. Towards its share Eimco contributed technical know-how consisting of right and license to manufacture existing Eimco Sedimentation and filtration equipment, along with the supply of and/or the agreement to supply general technical data including manufacturing drawings in the form as used and possessed by Eimco, relating to the sales, application, selection, material requirements, manufacture, installation and operation of such equipment, including but not limited to test procedures, instruction manuals, technical manuals, general arrangement and detail drawings, flow charts, research and development reports, sales manuals and bulletins, operating reports on existing installations and installation and operation manuals. It valued the know-how etc. at a sum of Rs. 2,35,000/- and paid the balance in cash as its contribution. The Board of Directors of the appellant allotted equity shares of Rs. 2,35,000/-, being of the value of the know-how, to Eimco by resolution passed on April 29,1968. In the assessment year 1969-70, the appellant claimed deduction of Rs. 2,35,000/- as revenue expenditure paid to Eimco towards consideration for supply of technical know-how by it. By order dated March 25, 1970, the Income Tax Officer treated that as a capital expenditure and allowed 1/14th of the said amount as allowable expenditure under Section 35-A of the Income Tax Act (for short the Act ). The appellant challenged that order before the Appellate Assistant Commissioner on the ground that the whole expenditure ought to have been allowed as revenue expenditure. While so, the Commissioner of Income Tax in exercise of its power under Section 263(1) of the Act revised the said order of the Income Tax Officer dated March 25, 1970 holding that the amount in question could not be treated as expenditure and that granting 1/14th of the said amount as capital expenditure under Section 35-A was erroneous and prejudicial to the interest of the revenue and thus set aside the same. Thereafter, the Appellate Assistant Commissioner dismissed the appeal and directed that 1/14th amount be added back as income of the assessee. Against both the orders, the appellant filed appeals before the Income-tax Appellate Tribunal. The Tribunal, on December 12, 1975, allowed appeals of the appellant taking the view that the said amount was revenue expenditure of the appellant. At the instance of the Revenue, the following two questions were referred to the High Court under Section 256(1) of the Act :

"(1) Whether on the facts and in the circumstances of the case, the Commissioner could interfere, acting under Section 263 of the Income-tax Act, 1961 with the order of the Income-tax Officer on a point which was directly in appeal before the Appellate Assistant Commissioner?

(2) Whether on the facts and in the circumstances of the cases, the sum of Rs. 2,35,000/- paid by the assessee company to the foreign collaborator constitute revenue expenditure?"

Both the questions were answered in favour of the Revenue and against the assessee by the High Court in the impugned order.

2. Mr.M. Uttam Reddy, learned counsel appearing for the appellant, did not seriously canvass the correctness of th