Payments made for the use of technical know-how can be considered revenue expenditures rather than capital expenditures, depending on the terms and substance of the agreement between the parties.

( 1 ) THE questions posed for our consideration by the Tribunal under section 256 (1) of the Incometax Act, 1961 (to be referred to in short as "the Act".), are as follows :

"1. Whether on the facts and in the circumstances of the case, the amount of Rs. 4 lakhs debited by the assessee to "deferred Revenue Expenditure. Technical know-how payment Account"was expenditure of a capital nature ?

"2. If answer to question No. 1 is in the affirmative, whether on the facts and in the circumstances of the case Tribunal erred in law in holding that the assessee company was not entitled to depreciation in respect of the said amount of Rs. 4 lakhs. 3. Whether on the facts and in the circumstances of the case, the amount of Rs. 1,09,191 paid by the assessee to Brotherhood Limited represented expenditure of a capital nature ? 4. If answer to question No. 3 is in the affirmative. whether on the facts and in the circumstances of the case, the assessee company was entitled to depreciation in respect of the whole or a part of the amount of Rs. 1,09,191.

( 2 ) THE assessee is a public limited company manufacturing turbines and other machinery. The four assessment years with which we are concerned are 1965-66 to 1968-69, the corresponding previous years ending on 31st May, 1964, 31st May, 1965, 31st May, 1966 and 31st May, 1967. All four above noted questions have been referred for the assessment year 1965-66; but only the first two have been referred for the subsequent assessment years.

( 3 ) THE disputes pertain to payments made in pursuance of two agreements entered into by the assessee with Petei Brotherhood Ltd. (to be referred to as "brotherhoods") and Bookers Sugar Machinery Group Limited (to be referred to as "bookers" ). The agreements with Brotherhoods and Bookers are dated 1st June, 1961 and 2nd June, 1961 respectively. Brotherhoods agreement is in connection with the manufacture of turbines whereas Bookers agreement is in connection with the manufacture of sugar mill machinery. The relevant clauses in the two agreements are similarly worded.

( 4 ) IN pursuance of these agreements, the assessee paid an amount of 40,000 to Brotherhoods and 50,000 to the Bookers in the accounting year relevant to the assessment year 1963-64. At the same time both Brotherhoods and Bookers advanced. 40,000 and 50,000 respectively to the assessee to be repaid in ten equal instalments. The amount of 90,000 paid under the agreements was at the relevant time equivalent to Rs. 12,00,000. The assessee capitalised the amount of Rs. 8 lakhs in its books of account and added it to the cost of plant and machinery. With regard to the balance of Rs. 4 lakhs it debited the same to an account called "deferred Revenue Expenditure Technical Know-how payment". This sum was carried forward for two years and in the year ending 31st May, 1964, relevant to the assessment year 1965-66, an amount of Rs. 50,000 was written off. Identical amounts were also written off for the assessment years 1966-67 and 1967-68. But for the assessment year 1968-69, the assessee became liable to pay an amount of Rs. 90,390 instead of Rs. 50,000 as a result of the devaluation of the rupee in June, 1966.

( 5 ) THE assessee claim these amounts as deductions while determining its profits, but the Income-tax Officer rejected its claims. He was of the view that the expenditure was clearly of a capital nature. He held that the technical services rendered by the foreign collaborators for the purpose of installation of the plant and machinery and for manufacture of products was a benefit of a lasting nature to the assessee. However, he did not object to the amount of Rs. 8 lakhs being included as actual cost of plant and machinery and depreciation being allowed thereon.

( 6 ) ON appeal to the Appellate Assistant Commissioner the disallowance was confirmed. The Appellate Assistant Cummissioner was of the view that the technical know-how expenses incurred by the assessees were not related to t