1. In this reference, originally the following three question were referred to us :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income from interest received from customers of Rs. 37,106 and machining charges amounting to Rs. 9,435 is liable to be deducted for the purpose of giving relief under section 80E of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 1,00,000 which the assessee was to pay in annual instalments of Rs. 20,000 beginning with the payment of the instalment paid in 1966 to the German collaborators under the agreement dated July 20, 1966, was a revenue expenditure and as such deductible while computing the total income of the assessee for the assessment year 1967-68 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 10,578 incurred on the visit of the managing director of the assessee to Germany was a revenue expenditure and as such deductible while computing the total income of the assessee for the assessment year 1967-68 ?'
2. One of the questions not referred to us is to found in paragraph 12 of the statement of the case. The Tribunal had declined to refer the said question. Aggrieved by the decision of the Tribunal, the commissioner took out a notice of motion which was made absolute by us and accordingly a supplemental statement of the case has been submitted by the Tribunal in which the said additional question, which shall be designated as question No. 4, also stands referred to us. The same reads as under :
'(4) Whether, on the facts and in the circumstances of the case, having regard to the fact that the assessee had shown the expenditure incurred in paying the first instalment of Rs. 20,000 in the year 1966 and not the whole of Rs. 1,00,000 in its accounts, the Tribunal was justified in allowing the assessee, the deduction of the whole amount of Rs. 1,00,000 while computing the total income for the assessment year 1967-68 ?'
3. A few facts may be stated. We are concerned with the assessment year 1967-68. The assessee is a limited company and carries on the business of manufacturing machinery used in sugar industry. The Income-tax Officer had passed original assessment order under section 143(3) on April 22, 1968. The assessee subsequently drew the attention of the Income-tax Officer to three points which it was contended had not been considered at the time of the original assessment. The third of these three points related to the reliefs available to the assessee under section 80E. The Income-tax Officer found that there was substance in the plea and he made an order under section 154 allowing the statutory deduction of 8% under section 80E. This was as per the attached schedule and the total amount of deduction allowed came to Rs. 1,44,789. The assessee was not satisfied with the computation made by the Income-tax Officer and an appeal was preferred to the Appellate Assistant Commissioner. Two of the contentions of the assessee pertained to machining charges recovered from the customers as also interest realised on machinery sold on credit to the customers. As far as these two items were concerned, the Appellate Assistant Commissioner held that the Income-tax Officer was right in excluding these two items from the scope of section 80E. When the appeal was carried further to the Tribunal, the Tribunal, accepted the assessee's submissions. However, it was found that the profits from machining charges could not be fully attributable to the machines manufactured by the assessee and they were apportioned half and half. The sum allowed came to Rs. 9,435. In respect of the interest income of Rs. 37,106, the Tribunal also accepted the submission of the assessee and allowed it as a deduction for the purpose of computation under section 80E. These two items are reflected in question No. 1.
4. Mr. Dastur, on behalf of the assessee, has submitted before us that the answer to be given to these question is concluded by the decision of this very Bench in Income-tax Reference No. 21 of 1974 - decided on August 25, 1983 [CIT v. Buckau Wolf New India Engineering Works Ltd. : 150ITR180(Bom) , where a question in respect of identical items was answered favour of the assessee. We have perused our judgment and it would follow that the answer to question No. 1 would have to be given in the affirmative.
5. As far as the remaining three question are concerned, we are required to consider the agreement between the assessee and its German collaborators. The relevant provisions of the said agreement from its beginning to the end of clause 5 have been extracted by the Tribunal in its appellate order in paragraph 16 thereof. The agreement pertains to the sale and transfer in Germany of technical know-how, workshop drawings and other requirements in connection with the manufacture of continuous centrifugal machines for the sugar industry in India. Under clause 5 of the said agreement, the consideration fixed for sale and transfer of this technical information, knowledge, know-how, experience, workshop drawings and other documents was Rs. 1,00,000 (Rupees one lakh), but the same was to be paid by five equated annual instalments, the first of such instalments was to be paid on or before the first day of October, 1966, and the remaining instalments were payable on or before the first day of October in each succeeding year.
6. As far as question No. 2 is concerned, the same pertains to the vexed question whether the amount payable to the German collaborators under the said agreement dated July 20, 1966, was revenue expenditure and as such deductible while computing the total income of the assess for the assessment year 1967-68. The further question referred by the Tribunal to us pursuant to the order made on the notice of motion and to be found in the supplemental statement of the case pertains to the question whether if the expenditure is held to be revenue expenditure and, therefore, deductible as such, whether in the year under consideration, the assessee was entitled to a deduction of only Rs. 20,000 or to the full amount of Rs. 1,00,000 ?
7. According to the Tribunal, the assessee was already manufacturing centrifugal machines used in sugar industry. The submission advanced on behalf of the assessee that the manufacture of continuous centrifugal machines was only an improvement over the products already manufactured by the assessee was accepted by the Tribunal. There was no evidence on record that the assessee purchased any new machine for the purpose of manufacturing continuous centrifugal machines. In any case, the agreement with the collaborators did not provide for the supply of any new machinery to the assessee company for the purpose of manufacturing continuous centrifugal machines. According to the Tribunal, reading the agreement as a whole, it formed the opinion that the agreement was for the purpose of rendering services to the assessee in the shape of making available to the assessee,the technical skill and technical know-how acquired by the foreign collaborators in the manufacture of continuous centrifugal machines.
8. Perusing the agreement, we are of the opinion that even if we were not to accept fully the reading of the same by the Tribunal but to accept to a certain extent the Department's contention that this was acquisition of know-how, we are constrained to come to the conclusion that such acquisition does not ipso facto amount to acquisition of an asset of an enduring nature. In this connection, we may set out a passage from the judgment which we delivered in the last session in Gannon Norton Metal Diamond Dies Ltd. v. CIT (Income-tax Reference No. 1 of 1976 - decided on October 19, 1983). The passage extracted from our judgment reads as under :
'What we have to consider is whether the payment has been made for acquiring an asset of an enduring nature. If know-how has been acquired unrelated to secret or patented processes or the right to be use the trade name or trade mark,then the acquirer of that know-how or even the purchasers of the know-hoe - since that phrase was repeatedly used or emphasised - would seem to acquire no asset of an enduring nature. If know-how acquired relates to the setting up of the plant or machinery, then perhaps it may have to be held to be capital in nature, although we are not called upon to decide that question in the present reference. If know-how acquired relates to the process of manufacturing, then the payment made for the same would have to be considered as revenue expenditure since he acquirer does not obtain by the expenditure any asset of an enduring nature. It is only the acquisition of information, guidance, or to put it in more familiar terminology, 'payment for consultancy'. That the consultant gives certain diagrams, specifications, list of machinery and estimate of expenses, and explanations as to how the production process is to be carried on and what safeguards are necessary to be ensured for securing a quality product, which would be accepted by the market, would seem to make no difference.'
9. We may add that in the aforesaid decision, we have referred to several decisions of this court in support of the views expressed in the passage which we have earlier extracted as also of the other High Courts which have taken a similar stand.
10. Nothing has been brought to our attention which will induce us to alter the view which we have taken in Gannon Norton Metal Diamond Dies Ltd.'s case. If that be so, the amount due to the German collaborators under the agreement dated July 20, 1966, would have to be regarded as revenue expenditure and deductible as such.
11. We shall now pass on to the third question, leaving to be considered a little later on the question of quantum relief to be allowed in respect of the amount payable to the German collaborators. As far as the amount of Rs. 10,578 included in the visit of the managing director is concerned, it seems to have been conceded before the Tribunal that the answer to be given to this question was consequential to the Tribunal's decision on the point of allow ability of the sum of Rs. 1,00,000 paid to the foreign collaborators for the technical know-how. As on the latter aspect of the matter we have upheld the Tribunal's decision that the amount to be paid to the collaborators was allowable as revenue expenditure, we must similarly uphold the Tribunal's decision on question No. 3.
12. The only point now remaining for our consideration is whether the assessee was entitled to claim a deduction in respect of the entire amount of Rs. 1,00,000 or only in respect of the sum of Rs. 20,000 actually paid during the assessment year.
13. Clause 5 of the agreement between the assessee and the German collaborators provides as under :
'5. In consideration of the sale and transfer of the technical information, knowledge, know-how, experience, workshop drawings and other documents, manufactures shall pay in the Federal Republic of Germany to collaborators the lump sum equivalent to Rs. 1,00,000 (Rupees one lakh) at the current rate of exchange in Deutsche Mark by five equated annual instalments, the first of such instalments to be paid on or before the 1st day of October, 1966, and the remaining instalments on or before the 1st day of October in each succeeding year.'
14. Undoubtedly in the year under consideration, the actual payment made by the assessee to the German collaborators came to Rs. 20,000 only, but what was submitted before the Appellate Assistant Commissioner, though rejected by him, and later on before the Tribunal, which accepted the contention, was that the assessee's liability to pay the sum of Rs. 1,00,000 (Rupees one lakh) to the German collaborators was crystallised in the assessment year in the amount of Rs. 1,00,000, although the assessee obtained the facility of paying the amount by five annual instalments. It is the admitted position that the assessee keeps its accounts on the mercantile system. It was submitted on behalf of the assessee that if the relevant provisions of the agreement are construed, it will have to be held that the assessee incurred its liability of Rs. 1,00,000 in the assessment year under consideration, though actual payment was spread over five years. It was submitted further that the fact that the assessee had not made an entry in his books for the full amount in the year in question was irrelevant and our attention was drawn to the observations in Supreme Court's decision in the matter of Kedarnath Jute Mfg. Co. Ltd. v. CIT : 82ITR363(SC) . It is true that in the above decision, the Supreme Court was considering the statutory liability for payment of sales tax, but the observations to be found at page 367 would seem to apply to all types of liabilities and not only to tax liability. It has been observed by the Supreme Court that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights no can the existence or absence of entries in the books of account be decisive or conclusive in the matter.
15. The question to be considered is whether there was accrual of liability in the assessment year, though with facility of a deferred payment or annual accrual of limited liability in the assessment year with similar accrual of liability in the following four years. Clause 5 clearly provides for consideration of Rs. 1,00,000 for what the German collaborators are supposed to provide to the assessee. Bearing in mind the system of accounting followed by the assessee, it has to be concluded that the entire amount of Rs. 1,00,000 was deductible in this year. As we have already come to the conclusion that the amount was deductible as revenue expenditure, we will have to uphold the Tribunal's order and conclusions contained therein in their entirety.
16. In the result, the four questions referred to us are answered as follows :
Question No. 1 : In the affirmative and in favour of the assessee.
Question No. 2 : Amount payable to the German collaborators under the agreement dated July 20, 1966, was revenue expenditure and as such deductible while computing the total income of the assessee for the assessment year 1967-68.
Question No. 3 : In the affirmative and in favour of the assessee.
Question No. 4 : Also in the affirmative and in favour of the assessee.
Commissioner will pay the costs of the reference to the Assessee.