1. These are three references under section 256(1) of the Income-tax Act, 1961. They arise out of a common statement of the case submitted by the Income-tax Appellate Tribunal and hence are being disposed of by a common judgment. The assessment years with which we are concerned in these references are assessment years 1966-67, 1968-69 and 1969-70. The questions referred to us for our determination are as follows :
2. Assessment year 1966-67 :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest and expenses in connection with the A. I. D. loan can be added to the actual cost of the machinery for the purposes of depreciation ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in bifurcating the compensation of Rs. 15 lakhs paid to foreign collaborators and allowing Rs. 1,91,500 thereof as revenue expenditure spread over a period of five years and treating the balance amount of Rs. 13,08,500 as part of the actual cost of the plant and directing allowance of depreciation thereon ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that roads and fencing form part of the factory building and consequently directing allowance of depreciation on the same ?
Assessment years 1968-69 and 1969-70 :
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the perquisites paid to Shri R. P. Sinsti were not to be considered under section 40(c)(iii) or section 40(a)(v) of the Income-tax Act, 1961, for the assessment years 1968-69 and 1969-70 and consequently deleting the disallowance as made by the Income-tax Officer ?'
3. It is clear from the aforesaid questions, that questions Nos. I to 3 pertain to Income-tax Reference No. 257 of 1975 which is for the assessment year 1966-67 and question No. 4 pertains to Income-tax References Nos. 257A and 257B of 1975 which pertain to the assessment years 1968-69 and 1969-70, respectively.
4. It is agreed between the counsel that in view of the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT and CIT v. Hindusthan Petroleum Corporation Ltd. : 98ITR167(SC) , question No. 1 must be answered in the affirmative and against the Revenue. As far as question No. 2 is concerned, it is again common ground that in view of the aforesaid decision of the Supreme Court, the balance amount of Rs. 13,08,500 referred to in the said question must be treated as part of the actual cost of the plant and depreciation allowance must be granted on that footing and the Tribunal was right in doing so. As far as the spreading out of revenue expenditure of Rs. 1,91,500 over a period of five years is concerned, the Revenue has no quarrel about that. The only question requiring determination is whether the said amount of Rs. 1,91,500 was capital expenditure as contended by the Revenue or revenue expenditure as contended by the assessee. As far as question No. 3 is concerned, it is again common ground that in view of the decision of a Division Bench of this court in CIT v. Colour-Chem Ltd. : 106ITR323(Bom) , this question must also be answered in the affirmative and against the Revenue. In view of what we have stated above, it is only the facts which relate to the remaining question, namely, question No. 4 and the disputed portion of question No. 2, which we will have to set out.
5. The assessee is a company limited by shares and is engaged in the manufacture of glasswares. The assessee entered into an agreement dated May 7, 1963, with M/s. Corning Glass Works, U. S. A., for technical collaboration. Under clause 2 of the agreement, it was provided that Corning would sell and Borosil (assessee) would purchase the know-how set out in Schedule 'B' to the agreement to enable the assessee to equip a factory for the manufacture of technical glass products and, in consideration thereof, the assessee would issue to the said Corning Glass Works equity shares of the assessee of the face value of Rs. 15 lakhs. The statement of case, in brief, makes it clear that out of this amount of Rs. 15 lakhs, Rs. 1,91,500 was allocated by the assessee to the purchase of technical know-how from the said Corning Glass Works and the balance amount of Rs. 13,08,500 was allocated for the purchase of plant, machinery and equipment. Both the counsels state that this is the correct position. The Income-tax Officer concerned held that the said amount of Rs. 1,91,500 spent for the purchase of know-how was in the nature of capital expenditure. On an appeal preferred by the assessee, the Appellate Assistant Commissioner came to the same conclusion. On a further appeal to the Income-tax Appellate Tribunal, however, the Tribunal took the view that the said amount constituted revenue expenditure and was allowable as a deduction and spread the deduction over a period of five years.
6. The assessee company paid salary of Rs. 97,902 in the previous year relevant to the assessment year 1968-69 and of Rs. 94,304 in the previous year relevant to the assessment year 1969-70, to one A. P. Giusti, one of the foreign technicians working in the assessee company. The Income-tax Officer, in his orders of assessment, disallowed the perquisites given to this employee under section 40(c)(iii) of the Income-tax Act, 1961, in the assessment year 1968-69 and under section 40(a)(v) of the said Act in the assessment year 1969-70, and added the excess perquisites with reference to one-fifth of the salary of the employee to the extent of Rs. 34,541 in the assessment year 1968-69 and Rs. 7,460 in the assessment year 1969-70, to the income of the assessee. These additions were confirmed by the Appellate Assistant Commissioner on appeal. On further appeal to the Tribunal, the Tribunal took the view that the taxing authority was not justified in disallowing the excess perquisites as aforesaid as A. P. Ginsti's salary was exempted from tax by an order of the Central Government as contemplated under section 10(6) of the said Act. The Tribunal took the view that the perquisites allowed to the said employee were not to be considered under section 40(c)(iii) by reason of the proviso to that sub-section. It is from this decision of the Tribunal that the aforesaid questions have been referred to us.
7. Coming first to the amount of Rs. 1,91,500 claimed by the assessee as revenue expenditure, the admitted facts show that this amount was spent by the assessee for purchasing technical know-how. In CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. : 123ITR538(Bom) , a Division Bench of this court has taken a view that technical know-how cannot be called a 'tangible asset' and the technical advice for the time being cannot, in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The length of the period of agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset. The Division Bench in that case took the view that, on the facts of that case, in essence, the agreements were for acquiring technical knowledge regarding methods of production and were not agreements under which the assessee had acquired any asset or advantage of an enduring nature for the benefit of its business, and, hence, the amounts paid for the acquisition of technical know-how must be regarded as revenue expenditure. Mr. Jetly frankly conceded that he was unable to distinguish the said decision in any way. In view of this and following the said decision, we take the view that the said amount of Rs. 1,91,500 paid for the acquisition of technical know-how must be regarded as a revenue expenditure and was allowable by way of deduction as revenue expenditure.
8. We now come to question No. 4. Section 10 of the Income-tax Act, 1961, lays down that certain incomes are not to be included in computing the total income of any person. It is common ground that under section 10, the salary paid to A. P. Giusti was not to be included in the total income in the relevant assessment years. In respect of this question, the submission of Mr. Jetly, to put it very briefly, is that the word 'chargeable' is used differently in the Income-tax Act from the word 'assessable' and that the levy of tax on income is a different thing from the chargeability of the income under the head 'Salary'. It was submitted by him that the salary received by A. P. Giusti was chargeable under the head 'Salary', but it was not taxable because of the exemption provided by section 10(6). That salary was not includible in the total income by reason of the specific exclusion under section 10 and, therefore the second proviso to section 40(c)(iii) of the said Act was not applicable. Section 40 of the said Act lays down that amounts referred therein shall not be deducted in computing the total income chargeable under the head 'Profits and gains of business or profession' notwithstanding anything to the contrary in sections 30 to 39. Clause (c)(iii) of section 40 was deleted by the Finance Act, 1968, with effect from April 1, 1969, and clause (a) (v) was inserted in its place. Clause (a) (v) of the said section, as it stood at the relevant time, inter alia, provided for a limited allowance in respect of perquisites, etc., and, in short, it provided that such perquisites to the extent that they exceeded one-fifth of the salary payable to the employee or one thousand rupees per month, whichever is less, would not be allowed by way of a deduction in computing the income of the employer. The second proviso laid down that nothing in the said sub-clause (v) of clause (a) would apply to expenditure which results in the provision of any benefit or amenity or perquisite to an employee, whose 'income chargeable under the head ' Salaries' is seven thousand five hundred rupees or less'. It is not possible to accept the submission of Mr. Jetly for the reason set out hereafter.
9. We find that in Bombay Burmah Trading Corporation Ltd. v. CIT : 145ITR793(Bom) , a Division Bench of this court, to which one of us was a party, took the view that words 'seven thousand five hundred rupees or less' in the second proviso to section 40(c)(iii) of the Income-tax Act, 1961, which was in pari materia with the aforesaid second proviso to sub-clause (v) of clause (a) of section 40 of the said Act, would include a nil amount as well and it could not be understood to mean 'from one rupee to Rs. 7,500'. The Legislature has not used any words which would imply that there should be at least one rupee chargeable under the head 'Salaries' in order to attract the provisions of the proviso. There is no rationale or logic for not giving the benefit of the proviso in a case where no part of the amount paid is chargeable under the head 'Salaries. Hence, the second proviso to section 40(c)(iii) would apply to the case of a company in respect of the perquisites provided to employees in the overseas branches and the expenditure incurred thereon cannot be disallowed. In coming to this conclusion, the Division Bench followed the decision of the Madras High Court in Addl. CIT v. Brakes India Ltd. : 118ITR820(Mad) . In that case, the question before the Madras High Court arose in relation to a foreign technician Whose salary could not be brought under the Income-tax Act, 1961, as it was not included in his total income. The question related to the perquisites granted to the employee in excess of one-fifth of the amount of salary payable to him. The Madras High Court took the view that the second proviso to section 40(C)(iii) would be attracted where there is no income chargeable under the head 'Salaries' and the case before that court was one where there was no income of the employee chargeable under the head 'Salaries'. In view of this decision of the Madras High Court which has been followed by the Division Bench of this court in the case of Bombay Burmah Trading Corporation Ltd. : 145ITR793(Bom) , and in the interest of uniformity. we are also inclined to follow the said decision of the Madras High Court. In view of this, we are of the view that the Tribunal was right in holding that the perquisites paid to A. P. Giusti are not to be considered under section 40(c)(iii) or section 40(a)(v) of the Income-tax Act, 1961.
10. In the result, all the questions referred to us are answered in the affirmative and against the Revenue.
11. The Commissioner to pay the costs in one set.