Chandurkar, Actg. C.J.
1. This reference was specially taken up for hearing today, because on the decision of one of the questions referred to in this reference depended the decision of Writ Petition No. 2759 of 1979, in which the claim for bonus made by the employees of the assessee almost twenty years back for the year 1960=61, was to be decided.
2. This is a reference made at the instance of the applicant-assessee under s. 256(1) of the I.T. Act, 1961, and the questions referred to by the Tribunal are as follows :-
1962-63, 1963-64 and 1965-66 assessment years.
'1. Whether, on the facts and in the circumstances of the case, the assessee's claim that the payment of the sum of Rs. 24 lakhs by the assessee to Automobile Products of India Ltd., Bombay, under the agreement dated April 29, 1961, was with a view to remove the obstruction in the way of the assessee's carrying on its business was rightly rejected by the Tribunal ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the above payment of the sum of Rs. 24 lakhs was made for the acquisition of a right for the manufacture of a product or an initial outlay for securing rights from Henry Meadows Ltd. U.K., and in consequently making disallowance of Rs. 15 lakhs, Rs. 3 lakhs and Rs. 6 lakhs respectively (out of the sum of Rs. 24 lakhs) paid during the accounting years corresponding to 1962-63, 1963-64 and 1965-66 assessment years ?
1963-64 assessment year :
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1 lakh out of the further payment of Rs. 2 1/2 lakhs to Automobile Products of India under the aforesaid agreement was of a capital nature and in consequently disallowing the above sum of Rs. 1 lakh ?
1964-65 and 1965-66 assessment years :
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Pounds 50,000 (Rs. 6,68,990) paid to Henry meadows Ltd., of U.K. under the agreement dated October 5, 1962, was capital expenditure to be disallowed and that, hence, the assessee was not entitled to the deduction of the above sum of 1/10th amount thereof written off as a revenue expenditure for 1964-65 and 1965-66 assessment years ?'
3. The learned counsel for the assessee at the hearing of the reference made a statement that question No. 3 was not being pressed by the applicant and need not, therefore, be answered.
4. On hearing the learned counsel for the assessee and the Revenue, we thought it necessary to reframe questions Nos. 1 and 2 in order to highlight correctly the controversy between the parties. With the consent of both the learned counsel, we have, therefore, reframed questions Nos. 1 and 2 as follows :
'1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim a deduction of Rs. 24 lakhs paid by the assessee to Automobile Products of India Limited under the agreement dated April 29, 1961, as revenue expenditure ?
2. If the answer to question No. 1 is in the affirmative, is the assessee entitled to the said deduction in the assessment year 1962-63 or in the relevant assessment years when the amounts of Rs. 15 lakhs, Rs. 3 lakhs and Rs. 6 lakhs were paid to Automobile Products of India Limited ?'
5. The facts out of which the questions in this reference arise are in a very narrow compass. A company by name Henry Meadows Limited, then an English Company (hereinafter referred to as 'Meadows company') by an agreement dated March 16, 1956, granted a licence to Automobile Products of India Limited (hereinafter referred to as 'API') permitting the API company to manufacture meadows engines and components thereof for a period of ten years in pursuance of the industrial policy of the Government of India by which the manufacturers of commercial vehicles were to be permitted to undertake manufacture of their own engines. The assessee decided to take up manufacture of diesel engines at a meeting held with the then Industries Minister. As part of the arrangement which contemplated that the Government of India would grant a licence to the assessee to manufacture diesel engines, an agreement was entered into firstly between the assessee and the API company dated April 29, 1961, and then between the assessee and the Meadows company dated October 5, 1962. The terms of the agreement with the API company required that the assessee should pay to the API Company a sum of Rs. 24 lakhs in three instalments, the first instalment of Rs. 15 lakhs being payable on the execution of the agreement, the second instalment of Rs. 3 lakhs being payable on expiry of twelve months from the date of execution of the agreement and the third and final instalment of Rs. 6 lakhs being payable on the expiry of twenty-four months from the date of execution of the agreement. The consideration for this payment of Rs. 24 lakhs was that the API company had agreed for the cancellation of the licence dated December 9, 1955, granted by the Government of India for the manufacture of Meadows engines. This agreement also provided that the assessee was to take over the machinery, equipment, drawings, specifications and literature from the API company.
6. After the agreement with the API company was entered into, the assessee entered into an agreement on October 5, 1962, with the Meadows company. A copy of the of=agreement with the Meadows company to annexure 'O' to the statement of the s=case. The main and the important term of the agreement is clause 10 thereof. This clause reads as follows :
'10. In consideration of (i) Meadows having furnished to Premier (as Premier hereby admits) a complete set of up to date drawings, blue prints, process sheets, specifications and technical data in connection with the Meadows engine, (ii) of Meadows undertaking to supply to Premier at any time during the continuance of this agreement one copy of any modified drawings adopted by Meadows, and (iii) of the export rights granted to premier by Meadows in clause 13 hereof, premier shall pay to Meadows upon the signing of this agreement capital sum of fifty thousand Pounds free of Indian taxation and all deductions, by sterling bank draft payable in London.'
7. This clause also provided for payment of recurring expenditure of payment of royalty at the rate of Pounds 10 per Meadows engine manufactured by the assessee. The agreement was valid for a period of five years and thereafter the agreement was to continue for a further period of five years unless determined earlier.
8. During the accounting year 1960-61, the relevant assessment year being 1962-63, the assessee had paid a sum of Rs. 15 lakhs out of the amount of Rs. 24 lakhs required to be paid to the API company. The sum of Rs. 15 lakhs so paid was debited to the profit and loss account. Though actually a sum of Rs. 15 lakhs alone was paid, the assessment proceedings for the relevant assessment year 1962-63, the assessee claimed deduction of the entire sum of Rs. 24 lakhs agreed to be paid to the API company under the agreement of April 29, 1961, on the ground that the liability for the said amount arose during the year of account. The ITO treated the amount of Rs. 24 lakhs as having been laid out to acquire the right to manufacture Meadows engines in India which were hitherto being manufactured by the API company. Thus, treating the amount of Rs. 24 lakhs as payment for acquiring exclusive right to acquire Meadows engines on a long-term or permanent basis, the said amount was treated as of capital nature. He, therefore, disallowed the deduction of the sum of Rs. 15 lakhs. In appeal by the assessee-company, the AAC took the view that by paying compensation to the API company, the assessee did not bring into existence any enduring advantage but only eliminated 'a persisting disadvantage'. He, therefore, allowed deduction of Rs. 24 lakhs in respect of the compensation payable by the assessee to the API company for the assessment year 1962-63.
9. The assessee has not challenged the decision given by the AAC that the deduction should be given in the assessment year 1962-63, but the Department did file an appeal before the Tribunal challenging the decision of the AAC and the question was whether the amount of Rs. 24 lakhs was deductible as revenue expenditure. The Tribunal took the view that the sum of Rs. 24 lakhs was expenditure incurred for the acquisition of a right to manufacture a particular product or alternatively it was an initial outlay for securing manufacturing right from the Meadows company. According to the Tribunal, the agreement between the assessee and the API company and the agreement between the assessee and the Meadows company could not be considered as independent of each other and according to the Tribunal 'the two agreements were dependent on each other'. The Tribunal took the view that though the assessee was already manufacturing some part of the truck, when the assessee undertook to manufacture a fresh item which went to make up a truck, the expenditure incurred would be of a capital nature. The Tribunal rejected the argument raised on behalf of the assessee that the payment made to the API company was intended to remove the obstruction to the carrying on of the assessee's business. Accordingly, the Tribunal set aside the order of the AAC.
10. In respect of the assessment year 1963-64, the assessee had also claimed a deduction of Rs. 3 lakhs, which is the payment made to the API company in terms of the agreement dated April 29, 1961. In view of its earlier finding that the sum of Rs. 24 lakhs was not deductible as revenue expenditure, the Tribunal disallowed the claim of Rs. 3 lakhs also.
11. During the assessment year 1964-65, the assessee also claimed a deduction of Pounds 50,000 equivalent to Rs. 6,68,990 paid to the Meadows company as a revenue expenditure. This amount was disallowed by the ITO. In appeal filed by the assessee, the AAC took the view that the purchase of technical know-how had resulted in the acquisition of an asset or an enduring advantage to the assessee and, therefore, not deductible. So far as this amount is concerned, the assessee had taken an appeal to the Tribunal. The Tribunal took the view, following the decision of the Karnataka High Court in Mysore Kirloskar Ltd. v. CIT : 67ITR23(KAR) , that the sum of Rs. 6,68,990 had been paid at the time of initiation of a new line of activity by the assessee and the payment would be of a capital nature. The Tribunal took the view that the assessee was not entitled to the benefit of the ratio of the decision of the Supreme Court that in CIT v. Ciba of India Ltd. : 69ITR692(SC) . The Tribunal found that there was no term in the agreement requiring the return of the drawings, blue prints and designs even after the agreement came to an end. The said amount was, therefore, treated as a capital expenditure. The findings recorded by the Tribunal with regard to the nature of the expenditure of Rs. 24 lakhs and Pounds 50,000 are now put in issue in the questions referred to in this reference.
12. It will be convenient to deal first with question No. 4. This question is in two parts. The first part deals with the question as to whether the assessee was entitled to the deduction of a sum of Pounds 50,000 in the assessment year 1964-65 and the latter part of the question deals with the alternative contention raised on behalf of the assessee before the AAC that in case the deduction of Pounds 50,000 was not permissible in the assessment proceedings of 1964-65, then for the two years in question, namely, 1964-65 and 1965-66, the assessee would be entitled to the write off one-tenth of the amount of Pounds 50,000 as a revenue expenditure. Obviously, the contention was that since the agreement with Meadows company was for ten years, the assessee was entitled to have such payment spread over a period of ten years with the result that in each assessment year commencing from 1964-65, the assessee would be entitled to a deduction of one-tenth of that amount.
13. We shall first deal with the first part of the question. Mr S.P. Mehta appearing on behalf of the applicant-assessee, has invited our attention to clause 10 of the agreement dated October 5, 1962, between the assessee company and the Meadows company. We have already reproduced clause 10 above. According to the learned counsel, clause 10 expressly refers to the consideration for which the sum Pounds 50,000 is being paid by the assessee. Clause 10 is unambiguous and it is clearly states that the sum of Pounds 50,000 is to be paid by the assessee as consideration for (i) a complete set of up to date drawings, blue prints, process sheets, specifications and technical data in connection with the Meadows engine, (ii) modified drawings, if any, adopted by Meadows, and (iii) of the export rights granted to the assessee under clause 13. Clause 13 contains a restriction that the assessee shall not 'without the previous written consent of Meadows sell or otherwise export during the term hereof any Meadows engine spares or component parts thereof to any country whatsoever outside the territory. Meadows agreed that Premier shall have the right to export transport vehicles incorporating the Meadows engine and appropriate spares to other countries.' That clause also provides for a right to export marine and industrial equipment incorporating the Meadows engine to certain countries. The agreement thus provides that the assessee will not be entitled to export Meadows engines as such but that vehicles fitted with Meadows engines could be exported. This is merely a consequential clause, because the main and dominant purpose of the agreement is to secure the know-how which Meadows company had in connection with the manufacture of Meadows diesel engines. According to Mr Mehta, the payment contemplated by clause 10 is payment for securing the know-how and technical information from the manufacturers of Meadows engines. Mr Joshi, appearing on behalf of the Revenue, wanted to contend that the payment contemplated by clause 10 of the agreement was really in the nature of capital payment for securing the right to manufacture Meadows engines. Now, as already pointed out, clause 10 which is crucial clause and which recites the nature of consideration contemplated by the parties, merely refers to the undertaking by the Meadows company to make available to the assessee the necessary drawings, blue prints and know-how, including any modified drawings, by the Meadows company. The question as to whether the payment for know-how is a revenue or capital expenditure has been settled by a series of decisions of this court. We so not consider it necessary to refer in detail to the several decisions, which are relied on by Mr Mehta. We may merely refer to a decision of this court in CIT v. Tata Engineering & Locomotive Co. Pvt. Ltd. : 123ITR538(Bom) , where the question of the nature of such an expenditure has been extensively considered. In that case, this court has taken the view that technical know-how is not a tangible asset and the length of the period of agreement is not of much consequence. It was pointed out that merely because an assessee who had entered into a contract with regard to know-how was entitled to use the know-how even after the agreement had expired, it did not mean that he had acquired the benefit of an enduring nature. It is undoubtedly true that the agreement had expired but it did not mean that he had acquired the benefit of an enduring nature. It is undoubtedly true that the agreement in question in that case was one of the foreign collaboration. The fact that the agreement with Meadows was similar to the one construed in that case does not make any difference to the principle laid down that when payment is made for obtaining know-how with regard to techniques of production, such a payment is of revenue nature and not of capital nature. This decision was later followed in two other decisions of this court in CIT v. Service Station Equipment Pvt. Ltd. : 132ITR130(Bom) and Cooper Engineering Ltd. v. CIT : 135ITR597(Bom) . In the latter case, the view taken by this court was that technical know-how and technical advice cannot in these days of technological and scientific development and consequent changes in production techniques, be treated as a capital asset and technical know-how made available under an agreement does not stand on the same footing as protected rights under a registered patent. We may point out that when the Tribunal decided the appeal before it in 1973, it did not have the advantage of the above decision and we have no doubt that if these decisions had been available to the Tribunal, the Tribunal would have taken a contrary view. We must, therefore, hold that the sum of Pounds 50,000 paid to the Meadows company under the agreement dated October 5, 1962, was deductible as revenue expenditure and the first part of question No. 4 has to be answered in the negative and in favour of the assessee. In view of our answer to the first part of question No. 4, Mr Mehta does not press for the alternative part which is the subject-matter of the latter part of question No. 4 and the latter part of question No. 4, therefore, is not required to be answered.
14. This brings us to question No. 1 as reframed by us which again raises an issue about the nature of expenditure of Rs. 24 lakhs payable to the API company under the agreement dated April 29, 1961. According to the learned counsel for the assessee-company, the expenditure of Rs. 24 lakhs must be treated as expenditure which is incurred by the assessee in order to remove API company which desired to manufacture engines from the way of the assessee. Alternatively, it was contended that the assessee had incurred the expenditure of Rs. 24 lakhs for removal of a possible competitor of the assessee and according to the learned counsel if the two agreement dated April 29, 1961, and October 5, 1962, are to be read together, the payment under the agreement dated April 29, 1961, is expressly made in order to get the benefit of the agreement dated October 5, 1962. Mr Joshi contended that the said sum of Rs. 24 lakhs can never be in the nature of a revenue expenditure, because according to the learned counsel, such amount cannot be treated as revenue expenditure and the amount is really paid for expansion of the business of the assessee in as much as a new product was being brought out, namely, diesel engines. The learned counsel for the Revenue contented that the purpose of the agreement with API company was that no other person could remain in the field and the only person who could have remained in the field was removed, namely, API company. Mr Joshi has referred us to decision of the Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT : 27ITR34(SC) , in support of his contention that amount spent for expansion of business had to be treated as a capital expenditure.
15. There is no dispute in this case that the two agreements dated April 29, 1961, and October 5, 1962, are part of the scheme the object of which was first to free the Meadows company from it obligations towards the API company under the agreement dated March 16, 1956, and then to enable the assessee, after the field was cleared, to enter into an agreement with the Meadows company for obtaining the necessary know-how for manufacture of Meadows engines in India. It is now well-settled that no comprehensive test can be laid down to determine whether a particular outgoing is of a capital nature of a revenue nature. As observed by the Supreme Court in Abdul Kayoom v. CIT : 44ITR689(SC) , each case depends on its own facts and none of the tests is either exhaustive or universal. The Supreme Court pointed out in that case that what is decisive is the nature of the business, the nature of the expenditure, the nature of the rights acquired and their relations, inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. In the decision relied on by Mr Joshi, the Supreme Court has referred to a large number of English and Indian decisions and it was pointed out that if the expenditure was made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it was properly attributable to capital and was in the nature of capital expenditure. If, on the other hand, it was made not for the purpose of bringing into existence any such asset or advantage but for running the business or work it with a view to produce profits, it was a revenue expenditure. In the same decision it was pointed out that in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations. The Supreme Court later pointed out that 'The character of the payment can be determined by looking at what is the true nature of the asset which has been acquired and not by the fact whether it is a payment in a lump sum or by installments'. Our approach in the present case would, therefore, be to ascertain, on the terms of the agreement between the API company and the assessee-company, as to whether there was any asset or advantage which was secured by the assessee-company under the agreement dated April 29, 1961. As already pointed out, the agreement dated April 29, 1961, was mainly intended to provide for payment of compensation to the API company, because the API company was to give up its rights under the agreement dated March 16, 1956, which provided for a licence to the API company for the manufacture of Meadows engines in India for a period of ten years. That agreement is not a tripartite agreement though it is obvious that the Meadows company was also to release the API company from its obligations under its agreement dated March 16, 1956. Annexure 'K' to the statement of the case is a copy of the minutes of the meeting with Mr Manubhai Shah, the then Industries Minister, regarding automobile policy and it mentions that API company had asked for compensation to the extend of Rs. 50 to Rs. 55 lakhs, and while the assessee was prepared to pay Rs. 15 to Rs. 20 lakhs, in case a higher amount was to be paid, the said amount was to be determined by the Minister. The overall effect of the agreement dated April 29, 1961, therefore, was that the Meadows company became free to enter into an agreement with the assessee, the API company got its licence cancelled by the Government of India, the Government of India became free to grant a licence to the assessee and the assessee became entitled to enter into a separate new agreement with the Meadows company. Therefore, of far as the assessee was concerned, the only right which it seemed to have acquired as a result of this agreement was a right to enter into an agreement with the Meadows company. We fail to see how, if this was the limited advantage which the assessee had got, this could be treated as an asset or an advantage of enduring character. This right cannot stand higher than the right flowing from the agreement dated October 5, 1962, between the assessee-company and the Meadows company. We also fail to see how this could be treated as a right to expand the business. Admittedly, the assessee was manufacturing trucks. It used to purchase Meadows engines from the API company and, undoubtedly, it had decided to manufacture the engines subject to the API company giving up its right under the agreement of March 16, 1956. The agreement of March 16, 1956, does not expressly provide for any expansion. Such expansion would be dependent on, firstly, the grant of licence by the Government of India and, secondly, making available of the know-how by the Meadows company. As a matter of fact, we are inclined to take the view that if the two agreements dated April 29, 1961, and October 5, 1962, are to be read together, then the nature of payment made by way of compensation to the API company was merely a first step towards incurring of the payment of the expenditure under the agreement dated October 5, 1962. The payment of the sum of Rs. 24 lakhs could not, therefore, have had any different character than that of revenue expenditure which was necessarily to be incurred before a licence or know-how could be obtained from the Meadows company. Having heard the learned counsel for the Revenue, we are not inclined to accept his submission that the said amount must be treated as an expenditure incurred for expansion of the business or that it was a capital expenditure, because it was not an operational expenditure. It is not, therefore, possible for us to accept the finding recorded by the Tribunal that the said amount of Rs. 24 lakhs was in the nature of capital expenditure. In the view which we have taken, question No. 1 has to be answered in the affirmative and in favour of the assessee.
16. So far as question No. 2 is concerned, the learned counsel for the assessee has made a statement before us that it is not necessary to deal with that question in view of our finding on question No. 1 and that the assessee is not interested in claiming deductions in the several assessment years in question following the assessment year 1962-63. According the questions reframed and referred to us in this reference are answered as follows :
Question No. 1 : In the affirmative and in favour of the assessee company.
Question No. 2 : Not necessary to be answered as the assessee is held entitled to claim the deduction in the assessment year 1962-63.
Question No. 3 : Not answered as the question is not pressed by the assessee-company.
Question No. 4 : In the affirmative and in favour of the assessee on the first part. The second part of the question is not answered as the same is not pressed.
17. The assessee-company will get the cost of this reference.