THE EIMCO K.C.P. LTD. MADRAS versus COMMISSIONER OF INCOME TAX,.MADRAS

Citation: [2000] 1 S.C.R. 1185 · Decided: 25-02-2000 · Supreme Court of India · Bench: D.P. WADHWA · Disposal: Dismissed
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Judgment (excerpt)

THE EIMCO K.C.P. LTD. MADRAS 
A 
v. 
COMMISSIONER OF INCOME TAX,.MADRAS 
FEBRUARY 25, 2000 
[D.P. WADHWA AND SYED SHAH MOHAMMED QUADRI, JJ.) 
B 
Income Tax Act, 1961 : 
Sections 35-A and 256( I )-Allowable expenditure-Appellate • Com-
pany, an Indo-American joint venture, allotted equity shares to the Ame1ican C 
Company equivalent to the value of technical know-how supplied-Deduction 
of value of technical know-how claimed as revenue expenditure-Income Tax 
Officer treated it as capital expenditure and allowed I/14th as allowable 
expenditure-While an appeal was pending before the Appellate Assistant 
Commissioner-The Commissioner of Income Tax held the expenditure not 
allowable-Appellate Assistal!t Commissioner later on dismissed the ap-
D 
peal-Income Tax Appellate Tribunal allowed the appeal-High Court on 
reference answered in favour of Revenue-On appeal Held, allotment of 
equity shares was reimbursement for the technical know-how, which can never 
be tenned as expenditure much less revenue expenditure. 
Section 263-Interference with orders of Income Tax Officer-Held, the 
Commissioner of Income Tax could not inter[ ere with the order on a point 
which was directly in appeal before the Appellate Assistant Commissioner. 
An American and an Indian company collaborated and floated the 
appellant company with an authorised capital of Rs. 1,00,00,000 consisting 
of 10,00,000 equity shares of Rs. 10 each. Each of them agreed to subscribe 
E 
F 
to Rs. 4,70,000 out of which Rs. 2,80,000 was to be paid as initial contribu-
tion. The American company contributed technical know-how which was 
valued at Rs. 2,35,000 and paid the balance in cash. In the assessment year 
1969-70, the appellant company claimed deduction of Rs. 2,35,000 as 
revenue expenditure for the said technical know-how. The Income Tax G 
Officer treated this sum as capital expenditure and allowed only 1/14th of 
it under Section 35-A of the Income Act, 1961. The Commissioner of 
Income Tax during pendency of the appeal before the Appellate Assistant 
Commissioner held that the amount in question could not be treated as 
expenditure so granting 1/14th of the said amount as capital expenditure H 
1185 
1186 
SUPREME COURT REPORTS 
[2000) 1 S.C.R. 
A 
was erroneous. Thereafter, the Appellate Assistant Commissioner dis-
missed the appeal. The Income Tax Appellate Tribunal allowed the appeal 
of the appellant company holding the said amount to be revenue expendi-
ture. 
B 
c 
D 
E 
F 
On a reference under Section 256(1) of the Act, 
High Court 
answered in favour of the Revenue. Hence this appeal. 
Dismissing the appeal, this Court 
HELD : 1. On the facts and in the circumstances of the case, the 
Commissioner of Income Tax could not interfere with the orders of the 
Income Tax Officer on a point which was directly in appeal before the 
Appellate Assistant Commissioner. [1188-D-F] 
Commissioner of Income Tax, Bombay v. Anuitlal Bhogilal & Co., 34 
ITR 30, relied on. 
Ram/al Onkannal v. Commissioner of Income Tax, Assam, 44 ITR 
578; Kelpunj E11te1plises v. Commissioner of Income Tax, Kera/a, 108 ITR 
294, approved. 
2. The appellant by allotting equity shares of Rs. 2,80,000 to the 
American Company reimbursed its contribution by way of know-how, 
which can never be treated as expenditure much less an expenditure laid 
out wholly and exclusively for purposes of the business of the appellant. 
This know-how was acquired to produce higher yield and improve the 
quality of the product, which the assessee-company was already manufac-
turing. The allotment of equity shares to the American company, in the 
circumstances of the case, cannot be termed as "expenditure much less 
revenue expenditure". [1191-B-F] 
Alembic Chemical Works Co. Ltd. v. Commissioner of Income Tax, 
G Gujarat, (1989) 177 ITR 377, relied on. 
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 4058-59 
of 1994. 
From ·the Judgment and Order dated 17.1.83 of the Madras High 
H 
Court in T.C. Nos. 1224 and 1225 of 1977. 
-i 
EIMCO K.C.P. LTD. v. C.I.T. [SYED. S. MOHAMMED QUADRI, J.] 1187 
M. Uttam Reddy, A.V. Rangam, B.A. Ranganadhan and G.I. A 
Gopalkrishnan for the Appellant. 
B.B. Ahuja, K.N. Shukla, K.C. Kaushik, Ms. Neera Gupta, Ms. 
Sushma Suri, Arvind Kumar Sharma, Mrs. Anil Katiyar, V.K. Verma and 
C. Ramesh for the Respondent. 
The Judgment of the Court was delivered by 
SYED SHAH MOHAMMED QUADRI,J. The judgment and order 
passed by the Division Bench of the High Court of Madras in T.C. N
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