The division bench of Allahabad High Court held that, payment of royalty and fee for technical assistance paid to Japaneese Company M/s Hongo is an allowable business expenditure and cannot be held as capital in nature.
The Assessee had granted licence by its parent company namely Hongo Japan for manufacture of automobile components and component parts as per specifications of Honga Japan. As per Article 18 of the agreement between the assessee and the Hongo Japan in the event of and upon expiration of the agreement in favour of the assessee, the later was obliged to discontinue the manufacture, sale and other disposition of the licenced products. During the pendency of agreement licence, the assessee was obliged to pay certain amount to company Hongo Japan by way of royalty and fee for technical assistance.
The Assessing Officer and CIT was of the view that the said payments were in the nature of capital expenditure and he therefore disallowed the revenue expenditure claimed by the assessee.
The Assessee has approached Income Tax Appellate Tribunal against CIT order and hence Tribunal reversed the impugned order.
The division bench comprising of Justice Bharati Sapru and Justice Saumitra Dayal Singh while upholding Tribunalās order observed that, āthe expenditure incurred by the assessee towards royalty and fee for technical assistance in pursuance of the licence agreement entered between the assessee and the company M/s Hongo Japan were revenue expenditure and not capital in nature in view of the fact, upon termination of the licence agreement, all rights created in favour of the assessee under the licence agreement stood extinguished and no benefit was passed on to or retained with the assesseeā.
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