Mrs. Sujata V. Manohar, J.
1. The assessee, Sudarshan Chemical Industries Pvt. Ltd., carries on business of manufacture of organic and inorganic pigments. The assessee entered into a collaboration agreement dated February 23, 1965, with M/s. H. Kohnstam and Co. Inc., New York, under which the foreign company agreed to give technical know-how to the assessee-company for a period of five years in the first instance concerning processes for the manufacture of certain intermediates and pigments. Under the agreement, there were certain items which were already being manufactured by the assessee-company. The foreign company agreed to give technical know-how in respect of these items. The foreign company also agreed to give technical know-how in respect of other items which were not manufactured by the assessee-company and which the assessee-company proposed to manufacture with the help of the technical assistance provided under the agreement by the foreign company. The agreement was for a period of five years subject to renewal. The payment was made in a lump sum amounting to Rs. 1,16,390. This payment was made in the form of 840 fully paid-up shares of the assessee-company issued to the foreign company.
2. The dispute relates to the assessment year 1966-67. The Income-tax Officer held that the debit of Rs. 1,16,390 made by the assessee-company was in respect of payment of a capital nature. He disallowed the claim for deduction made by the assessee-company in respect of this amount.
3. The assessee-company went in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the amount represented revenue expenditure since the agreement did not contemplate any outright purchase by the assessee-company of any technical information and for other reasons which are recorded in his order.
4. Being aggrieved, the Revenue went in appeal before the Income-tax Appellate Tribunal. The Tribunal held that under the agreement, the assessee had received a two-fold advantage : one related to the right to manufacture raw material which it was hitherto importing and the other advantage was to receive technical know-how and thus improve the products which the assessee was already manufacturing. The Tribunal held that since the consideration paid covered both these advantages, it was necessary to examine the nature of these advantages. It further held that the first advantage was connected with a new line of activity which the assessee was going to start. This advantage, the Tribunal considered to be of a capital nature, and it held that a portion of the consideration attributable to such activity would be of a capital nature while the payment attributable to the advantage of the latter type would be clearly of a revenue nature. The Tribunal apportioned the expenditure incurred under the agreement to these two types of advantages, and it held that one-fifth of the expenditure should be considered as expenditure of a capital nature while four-fifths of the expenditure should be considered as expenditure of a revenue nature. The Tribunal also felt that the form in which payment was made to the foreign company was irrelevant.
5. From this decision of the Tribunal, the following questions of law have been referred to us at the instance of the Department under section 256(1) of the Income-tax Act, 1961 :
'(1) Whether, on the facts and in the circumstances of the case, the whole of the payment of Rs. 1,16,390 made by the assessee-company in the form of 840 of its shares issued to M/s. Kohnstam & Co. Inc., New York in pursuance of the collaboration agreement between them was capital expenditure and not revenue expenditure ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that only one-fifth of the said expenditure of Rs. 1,16,390 was capital expenditure and the remaining four-fifths thereof was allowable revenue expenditure ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the technical know-how (in respect of that part of the expenditure which was held by the Tribunal to be capital expenditure) is covered by the inclusive definition of the word 'plant' given in section 43(3) of the Income-tax Act, 1961, and that as such the assessee-company would be entitled to depreciation thereon as is admissible in the case of 'plant' ?'
6. In the first place, all these questions have been referred to us at the instance of the Revenue. It has challenged that part of the Tribunal's finding which held that four-fifths of the expenditure incurred by the assessee was expenditure of a revenue nature. The assessee-company has not challenged the : disallowance of one-fifth of the expenditure which, it contended, was revenue expenditure and which the Tribunal held to be of a capital nature. It is, therefore, not necessary for us to consider the question of apportionment. What we have to consider is whether the Tribunal was wrong in holding that four-fifths of the expenditure incurred was an expenditure of revenue nature.
7. In view of the decisions of this court in CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. : 123ITR538(Bom) , Cooper Engineering. v. CIT : 135ITR597(Bom) , CIT v. Wyman Gordon (India) Ltd. : 144ITR911(Bom) , it is now well-settled that technical know-how and 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 agreement of foreign collaboration, where foreign know-how is availed of for payment, is, in substance, a transaction of acquiring the necessary technical information with regard to the technique of production. In the present case, looking to the nature of the agreement between the parties, it is clearly an agreement under which the assessee got technical information and know-how for the purpose of improving the products that it was already manufacturing and also for the purpose of manufacturing certain new items. This agreement was for a period of five years only and it gave to the assessee the benefit of research and any technical information available with the foreign company. In fact, under the agreement, an exchange of technical information is also contemplated. In these circumstances, the expenditure incurred and consideration paid under this agreement have to be treated as revenue expenditure, in view of the principles laid down in these three judgments. It is true that payment has been made in the form of fully paid-up shares in the assessee-company. But the form of payment makes no difference to the nature of payment.
8. It may also be noted that the two decisions relied upon by the Tribunal in support of its conclusion that the expenditure was of capital nature have been subsequently overruled by Full Benches of the High Courts concerned. Thus, the case of Mysore Kirloskar Ltd. v. CIT : 67ITR23(KAR) , has been overruled by the same High Court in the case of Mysore Kirloskar Ltd. v. CIT : 114ITR443(KAR) . Similarly, the decision in the case of Hylam Ltd. v. CIT : 87ITR310(AP) , has been overruled in the case of Praga Tools Ltd. v. CIT : 123ITR773(AP) . Question No. 2 must, therefore, be answered in the affirmative, that is to say, in favour of the assessee and against the Department.
9. In view of the answer to question No. 2, it is common ground that it is not necessary to answer question No. 1. As we have, already mentioned, the form of payment does not make any difference to the kind of payment that was made, namely, whether it was of a revenue nature or of a capital nature. We accordingly decline to answer the same.
10. As far as question No. 3 is concerned, this point is also covered by a decision of this court in the case of CIT v. Emco Electro Pvt. Ltd. : 118ITR864(Bom) . In that case, our High Court has held that having regard to the legislative intent to give a wide meaning to the word 'plant' in section 32, the material record of know-how is clearly included in 'plant'. The court has also held that all documents which embody know-how could be considered as part of the term 'plant'. A similar view has been held by the Gujarat High Court in the case of CIT v. Elecon Engineering Co. Ltd. [ : 96ITR672(Guj) . In fact, the decision in this case was followed by our High Court in the case of CIT v. Emco Electro Pvt. Ltd. : 118ITR864(Bom) . The Gujarat High Court has also held that there is no reason to exclude from the wide meaning of the term 'plant' objects such as drawings, patterns, designs, etc., which, like books, are the embodiments of know-how and serve the purpose of teaching at long range. It also held that know-how would be included within the meaning of the word 'plant' in section 32. In the present case, know-how was in the form of printed literature giving technical information under the agreement in question. Such technical know-how would, therefore, be covered under the definition of the word 'plant', in view of the ratio laid down in the two judgments referred to above. Question No. 3 will, therefore, have to be answered in the affirmative, that is to say, in favour of the assessee and against the Department.
11. The applicant will pay to the respondents the costs of the reference.