Skip to content


Commissioner of Income Tax Vs. Indian Standard Metal Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberI.T. Ref. No. 21 of 1975
Judge
Reported in[1987]163ITR763(Bom)
ActsIncome Tax Act, 1961 - Sections 37(1)
AppellantCommissioner of Income Tax
RespondentIndian Standard Metal Co. Ltd.
Excerpt:
- - ' clause (1) of the said agreement provided, inter alia, that the technical information, service facilities and the like supplied by the u. company would provide complete and detailed drawings, designs, data information and advice to the best of the u......in the circumstances of the case, the annual payment of rs. 22,725 equivalent of 1,250 paid by the assessee company to the u. k. company under the agreement dt. 19-5-1964, was an expenditure of a revenue nature allow able in the computation of the assessee's income for each of the asst. yrs. 1968-69 and 1969-70 ?'the other question which was referred at the instance of the assessee is as follows :'whether, the sum of rs. 1,02,852.70 paid by the assessee to the company up to 31-12-1966 under the agreement dt. 19-5-1964, was to be treated as part of the actual cost of the plant and machinery qualifying for depreciation thereon for the asst. yrs. 1968-69 and 1969-70 ?'2. the facts giving rise to the reference can be stated shortly, as there is no serious dispute regarding the decision of.....
Judgment:

Kania, J.

1. This is a reference on a case stated u/s 256(1) of the IT Act, 1961. The common question of law referred to us for determination is as follows :

'Whether, on the facts and in the circumstances of the case, the annual payment of Rs. 22,725 equivalent of 1,250 paid by the assessee company to the U. K. Company under the agreement dt. 19-5-1964, was an expenditure of a revenue nature allow able in the computation of the assessee's income for each of the asst. yrs. 1968-69 and 1969-70 ?'

The other question which was referred at the instance of the assessee is as follows :

'Whether, the sum of Rs. 1,02,852.70 paid by the assessee to the company up to 31-12-1966 under the agreement dt. 19-5-1964, was to be treated as part of the actual cost of the plant and machinery qualifying for depreciation thereon for the asst. yrs. 1968-69 and 1969-70 ?'

2. The facts giving rise to the reference can be stated shortly, as there is no serious dispute regarding the decision of the questions regarding the decision of the questions referred before us. The assessee is a limited company. The assessment years are the asst. yrs. 1968-69 and 1969-70, the relevant previous years being those ended on 31-12-1967 and 31-12-1968 respectively. During the calendar year ending on 31-12-1967, the assessee, started for the first time the manufacture of P.I.V. gears, the said gears being a type of gears. For the purpose of manufacturing these gears, the assessee had entered into an agreement with a U.K. Company called stone Wallworks Ltd. (referred to hereafter as 'the foreign company') on 19-5-1964. Under this agreement, the assessee received 'competent technical advice, information and assistance in Europe to enable it to manufacture P.I.V. gears and to manufacture at its works in Bombay on an economical and efficient basis the maximum possible output of P.I.V. gears of all sizes.'

Clause (1) of the said agreement provided, inter alia, that the technical information, service facilities and the like supplied by the U.K. Company to the assessee by virtue of this agreement shall be on an exclusive basis for India and the said clause set out what was meant by expression 'India' as used therein in cl. 3 of the said agreement set out the nature of the technical services which were to be provided by the said U.K. Company these service included technical knowledge, information and advice as might be required to bring the assessee into effective and efficient operation for the manufacture of the P.I.V. gears of all standard sixes, shapes and specifications with the maximum possible speed and for developing and manufacturing on the most efficient and economical basis the maximum possible output of such P.I.V. gears. It was also provided that the said U.K. Company would provide complete and detailed drawings, designs, data information and advice to the best of the U.K. Company's own practical experience and knowledge of the most efficient methods and processes. It was further provided in the said agreement that the said U.K. Company would give facilities for training at the said U.K. Company's English Plants and Establishment of such employees of he assessee as might be deputed by the assessee limited to the maximum number of trainees provided for in the said agreement. A sum of 5,000 was paid by the assessee to the U.K. Company on 25-8-1962 under the said agreement. Thereafter, instalment of 1250 each were paid and by 31-12-1966 the assessee had paid 10 such instalments to U.K. company. The rupee equivalent of all these payments amounted to Rs. 1,02,852.70 Ps. In the calendar year ending on 31-12-1967, another instalments of 1,250 (equivalent to Rs. 22,725) was paid to the U.K. Company by the assessee. The same was the position in the calendar year 1968. The ITO disallowed these payments in the computation of the taxable income of the assessee on the ground that the entire payment was of a capital nature and was not liable to be deducted from the total income of the assessee for the purpose of arriving at the assessable income. The AAC upheld the disallowance. The alternative claim of the assessee to allow depreciation was also rejected by the AAC.

3. On an appeal preferred by the assessee to the IT Appellate Tribunal, however, the Tribunal upheld the claim of the assessee to the deduction of the said amounts on the ground that the payments were of a revenue nature and were in the nature of expenditure allowable in the computation of the assessee's income. The clauses of the said agreement dt. 19-5-1964 show that it is an usual collaboration agreement and this type of agreement came up for consideration before a Division Bench of this court in CIT, Bombay City-I v. Tata Engineering & Locomotive Co. Pvt. Ltd. It was held in that case on the facts therein that in essence that agreements were for acquiring technical information regarding methods of production can the assessee had not acquired any asset or advantage of an enduring nature for the benefit of its business. The amounts paid for the provision of know-how and licence to use the trade name were revenue expenditure. It was further held that the expenditure incurred on such training was closely related to the profit earning process and was allowable as revenue expenditure. We find that in the case before us also, the said agreement dt. 19-5-1964 was for the purpose of acquiring knowledge regarding methods of production of P.I.V. gears and for the training of the personnel of the assessee company with a view to achieving maximum production of the P.I.V. gears and was closely related to the profit earning process. Following the said decision, therefore, the payments in question must beheld to be of a revenue nature and allowable as a deduction in the computation of the total income of the assessee. We may point out that we are further supported, in our view, by the decision of a Division Bench of this court in CIT, Bombay City-IV v. Wyman Gordon (India) Ltd.. In view of the aforesaid, the first question, referred to us, being the common question must be answered in the in favour of the assessee. As far as the second question is concerned, it is agreed by Mr. Shetty that it was not open to the assessee to raise that question at all in view of the decision of the Supreme Court in CIT, Kerala v. Damodaran : [1980]121ITR572(SC) . In view of this, we decline to answer the said question. In view of the fact that there is no serious contest, the parties will bear their own costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //