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Antifriction Bearings Corporation Ltd. Vs. Commissioner of Income-tax, Bombay City-iii, Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 76 of 1968
Judge
Reported in[1990]186ITR181(Bom)
ActsIncome Tax Act, 1961 - Sections 37(1)
AppellantAntifriction Bearings Corporation Ltd.
RespondentCommissioner of Income-tax, Bombay City-iii, Bombay
Appellant AdvocateV.P. Mehta, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
direct taxation - capital expenditure - section 37 (1) of income tax act, 1961 - whether royalty amount is deductible as revenue expenditure - payment made in order to obtain advice and consultation from time to time as well technical know-how could not partake nature of capital expenditure - expenditure is revenue expenditure - held, assessee entitled for deduction. - - these drawings included manufacturing plans containing technical data regarding the necessary manufacturing facilities, devices as well as gauges and the drawing and the technical data was comply with the latest state of engineering which was used by the austrian company. the austrian company under the terms of the agreement was also bound to give technical advice in such a way that the company continuously received.....chandurkar, j. 1. the questions which have been referred to this court at the instance of the assessee arise out of the assessment proceedings in respect of the assessment year 1963-64 in which a liability to make certain payments to a foreign company with whom the assessee had entered into a collaboration agreement had already arisen, according to the assessee, in terms of the said agreement. 2. the assessee is limited company, which was established on 30th may, 1961, for the purpose of manufacture and sale of steel ball and thrust bearings. this business was originally carried on by a firm, messrs. dirajlal & co., and was taken over by the assessee on 1st of august, 1961. during the calendar year 1962, the assessee-company entered into a collaboration agreement on 22nd march, 1962, with.....
Judgment:

Chandurkar, J.

1. The questions which have been referred to this court at the instance of the assessee arise out of the assessment proceedings in respect of the assessment year 1963-64 in which a liability to make certain payments to a foreign company with whom the assessee had entered into a collaboration agreement had already arisen, according to the assessee, in terms of the said agreement.

2. The assessee is limited company, which was established on 30th May, 1961, for the purpose of manufacture and sale of steel ball and thrust bearings. This business was originally carried on by a firm, Messrs. Dirajlal & Co., and was taken over by the assessee on 1st of August, 1961. During the calendar year 1962, the assessee-company entered into a collaboration agreement on 22nd March, 1962, with an Austrian concern known as Messrs. Steyr-Daimler-Puch Aktiengesellschaft, Steyr, to which the Tribunal has referred as 'Steyr', but we shall hereafter refer to the said company as the 'Austrian company'. The copy of the agreement is annexed to the statement of the case as annexure 'A'. By the said agreement the Austrian company agreed to furnish to the assessee-company the required drawings the technical data necessary for the manufacture of cylindrical and tapered roller bearings. These drawings included manufacturing plans containing technical data regarding the necessary manufacturing facilities, devices as well as gauges and the drawing and the technical data was comply with the latest state of engineering which was used by the Austrian company. The Austrian company under the terms of the agreement was also bound to give technical advice in such a way that the company continuously received information about the state of ball bearing engineering and international standard as well as exchange of views dealing with the required quality, the modern inspection procedures and requirements of the customers on the bearing to be manufactured. The Austrian company had agreed to depute at the request of the assessee company and in case of necessary one or more of its qualified engineers or qualified workers to India in order to advice the company in the solution of technical difficulties particularly with reference to the initial operation of the new plant and the fare had to be borne by the Austrian company, but the expenses for accommodation and living in India had to be borne by the assessee-company. Under clause 10 of the agreement, the Austrian company had agreed to grant to the assessee-company the use of patents concerning all types of bearings referred to in the agreement with certain exceptions. The Austrian company was to advise the assessee-company as far as possible with regard to the procurement of material, auxiliary production facilities and additional equipment for the operation of the Indian plant without any responsibility for the supply, prices and payment of machinery, material, etc. The assessee-company had agreed that it would not be entitled to use any knowledge about investing of the Austrian company for the procurement of its own patents. the consideration which the assessee-company was required to pay in pursuance of the collaboration agreement with the Austrian company was specified in clause 16 as follows :

'In consideration of the premises the company agrees to pay to Steyr during the term of this contract a yearly guaranteed royalty in the amount of pound 13,000 (thirteen thousand pounds) which is fixed on the Indian taxes on royalty being 50%. The said lump sum does not depend on the production or the sale of the bearings, and is subject to Indian duties. In case of a change in taxation, a minimum net sum of pound 6,500 (six thousand and five hundred pounds) will have to the paid to Steyr in any event. The granting of the permission for remittance shall be guaranteed by the Indian Government. Actual payment and transfer of licence fee to Steyr shall commence only after five years signing the agreement and payment and transfer of the said fee for the first five years as also for the subsequent period of 5 years shall be made by the end of the tenth year form the commencement of this contract at the latest.'

3. The duration of the agreement was provided for in clause 17 of the agreement, which read as follows :

'This agreement shall remain in force and effect for a period of ten years from the date of 22nd March, 1962. After expiry of the said period of ten years Steyr permits the company to continue the licensed production and the sale of the bearings above referred to. Should for any reason premature ending of this contract take place the company shall return all the furnished documents immediately to Steyr.'

4. There were other clauses in the agreement under which the personnel of the assessee had to be trained by the Austrian company and under clause 9 it is provided that all technical documents furnished to the company would remain the property of the assessee-company and the assessee-company was under obligation to treat the information contained in the specification, designs, plans, etc., strictly confidential. One of the terms of the agreement was that the Austrian company agreed to apply and take equity shares of the company for an amount of 2.5 million Austrian shillings and the Austrian company was entitled to appoint one director on the company's board and also an adviser to the managing director.

5. Now, in respect of the calendar year 1962, the guaranteed royalty of pound 13,000 equivalent to Rs. 1,35,343 was not charged by the assessee to the profit and loss account but was claimed by it as an allowance before the Income-tax Officer. The Income-tax Officer took the view that under the terms of the collaboration agreement, the payment of the royalty had been deferred and the liability was only a contingent liability and could not be allowed as deduction. The income-tax Officer did not think it necessary to go into the question as to whether the expenditure incurred was of a capital or revenue nature. The view that it was contingent liability was provided that actual payment transfer of licence fee to the Austrian company shall commence only after five years after signing the agreement. and the payment and transfer of the said fee for the first five years as also for the subsequent period of five years shall be made by the end of the tenth years from the commencement of the contract at the latest. It must be stated that the assessee-company had also claimed that expenditure incurred as travelling expenses amounting to Rs. 56,520 by the chairman, the managing director, the technical adviser, the words manager and the assistant works manager in connection with the collaboration agreement and to discuss the production programme and possibilities of increasing the machinery, and to supply goods to different parts of Europe, was in the nature of revenue expenditure. The Income-tax Officer took the view that the expenditure was incurred entirely for initiating the new project, to secure capital investments and to purchase plant and machinery and it was, therefore, of a capital nature.

6. In appeal field by the assessee-company before the Appellate Assistant Commissioner, the Appellate Assistant Commissioner called for a finding from the Income-tax Officer whether the amount of royalty payable under the agreement would represent a capital outlay. In his report, the Income-tax Officer stated that the agreement with the Austrian company brought about a benefit of an enduring nature to the company and the royalty was, therefore, a capital expenditure. The Appellate Assistant Commissioner finally held that the royalty amount of Rs. 1,35,343 was a capital expenditure incurred to obtain benefits of enduring nature and was not allowable. The expenditure incurred on travelling was also held to be of a capital nature.

7. In appeal the Tribunal took the view that the right to use the know how, etc., and that too far an indefinite period, and acquisition of a capital asset should be distinguished from the other benefits under the agreement like user of patents and receiving continuous advice and assistance for manufacture including information embodying in the fruits of further research. The Tribunal, therefore, split up the amount of royalty on a rough and ready estimate and took the view that it would be proper to allocate 50% of the sum of pound 13,000 as pure licensing royalty while the balance of 50% should be attributed to acquisition of the capital asset. It was urged before the Tribunal that if a portion of Rs. 1,35,343 was to be treated as capital expenditure, then the cost should be allowed to be added to the original cost of the assets consisting of the machinery, but the Tribunal taking the view that the machinery was not put to use in the year of assessment in question, decided that it was not necessary to give any final decision in that behalf. With regard to the disallowance of Rs. 21,842 which alone was the subject-matter of the appeal and which related to the foreign tour expenses of the two directors and the technical adviser, the Tribunal found that the expenditure was connected with the initiation of the substantial expansion of the company's business. The Tribunal took the view that 'for the new venture the fixed capital was augmented to Rs. 48 lakhs from the original capital of Rs. 5 lakhs'. After recording a finding that the managing director's tour abroad was for signing the agreement, for the arranging supply of machinery, etc., while the technical adviser's visit was mostly for selection of machinery, expediting their delivery, etc., it held that the cost of the tour would also be on capital account and thus upheld the disallowance of Rs. 21,842.

8. On these facts the following questions have been referred by the Tribunal to this court under section 256(1) of the Income-tax Act, 1961 :

'(1) Whether the sum of Rs. 1,35,343 or any portion thereof is deductible as revenue expenditure

(2) Whether the claim of the company that the portion of the sum of Rs. 1,35,343 not allowed as revenue expenditure should be added to the cost of depreciable assets, should have been considered by the Tribunal even if the machinery was not brought into use in the material year but in subsequent years

(3) Whether, on the facts and in circumstances of the case, the cost of foreign tour amounting to Rs. 21,842 is a capital expenditure

(4) If the answer to question NO.(3) is in the affirmative, whether the Tribunal has jurisdiction in deciding the appeal for the material year if any portion of the amount can be included in the original cost value of the factory, plant or machinery for granting depreciation in future years ?'

9. We may mention that the statement of the case indicates that the first question has been referred at the instance of the revenue and the remaining three questions have been referred at the instance of the assessee company.

10. Taking question No. 1 first, it is contended by Mr. Mehta appearing on behalf of the assessee-company that all that was provided to be done under the collaboration agreement was that the assessee-company was to be allowed to have access to the know-how possessed by the Austrian company and that the payment in the nature of royalty was really in the form of remuneration for making available the specialised know-how and advice form time to time for the purposes of increasing the production of the company. According to the learned counsel, the company had already started production and was manufacturing ball bearings but that with a view to expand the business a new project was undertaken and new line of manufacture was entered upon and the company wanted to undertake the manufacture of cylindrical roller bearings and tapered roller bearings. The manufacture of these new kinds of bearings, according to the counsel, was intended to expand the existing business of the company with a consequential increase in the profits of the company and, therefore, according to the learned counsel, merely making available the know-how and the specialised advice tendered by the Austrian company from time to time could not be said to amount to acquisition of an asset of an enduring character. Consequently, according to the learned counsel, the payment made in order to obtain such advice and consultation from time to time as well as the technical know-how could not partake of capital expenditure but that since it was expenditure incurred for the purposes of expansion of an existing factory, it properly partook of revenue expenditure and that the taxing authorities were, therefore, in error in disallowing the amount for the payment of which a liability had accrued in respect of the assessment year in question. Heavy reliance was placed by the learned counsel on the decision of the Supreme Court in commissioner of Income-tax v. Ciba of India Ltd. : [1968]69ITR692(SC) which, according to the learned counsel, now settles the legal position that where royalty is paid to a foreign based firm in respect of technical know-how and advice made available from time to time, it does not result in acquisition of an asset of an enduring character and such expenditure must, therefore, be treated properly as revenue expenditure.

11. The task of considering the question as to whether in the case of payment of royalty in lieu of know-how and technical advice rendered from time to time partakes of the nature of capital expenditure or revenue expenditure has,fortunately for us, become very light in view of the decision relied upon by the learned counsel for the assessee. It is true that no two collaboration agreements could be identical, but, as we shall presently show, there were certain salient features in the agreement in question which have also been consider by the Supreme Court in the case of Ciba of India Ltd. : [1968]69ITR692(SC) . The salient features of the agreement in question are that the Austrian company is to grant a licence for the manufacture of certain special kinds of bearings to the assessee-company and in the respect thereof, the assessee-company was to be furnished with the necessary drawing and technical data. Restriction was put on the access-company that the know-how which was made available to the company was to be treated as completely confidential and this knowledge was not permitted to be used by the assessee-company for procurement by it of its own patents. The knowledge could not be shared with third parties. The agreement, though it was initially to be operative for a period of 10 years, also provided that in case the agreement came to an end prematurely, the assessee was to return all the furnished documents immediately to the Austrian company. The substance of the agreement, therefore, was that the know-how made available to it was to be used for a very limited purpose and the assessee-company was not at liberty to make use of that know-how in any manner which it liked. The agreement, therefore, clearly indicates that the payment of royalty which was to be made to the Austrian company was merely payment made with a view to acquire certain technical knowledge for a limited purpose. It was really in the nature of fees paid for being allowed to use knowledge belonging to others for a limited purpose with possibility of the agreement coming to an end even before the expiry of the full length of 10 years in which case the designs and the other documents containing the know-how had to be returned to the Austrian company. Whether such availability of know-how for temporary period would result in acquisition of an asset of an enduring character was the very question which the Supreme Court was called upon to deal with in the case of Ciba Company : [1968]69ITR692(SC) . In that case, Ciba Ltd. was a Swiss company and the pharmaceutical section of the said company in India was taken over by the assessee, Ciba of India Ltd. (hereinafter referred to as the 'Indian company'). There was an agreement between the Indian company and the Swiss company by which the Swiss company undertook to deliver to the assessee all processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of products discovered and developed in the Swiss company undertook to deliver to the assessee all processes, formulae, scientific data, working rules and prescription pertaining to the manufacture or processing of products discovered and development in the Swiss company's laboratories and to forward to the assessee as far as possible all scientific and bibliographic information, pamphlets or drafts which might be useful to introduce licensed preparations and to promote their sale in India. the Indian company was also granted a full and sole right and licence under the patent listed in the agreement to make, use, exercise and vend the inventions specified therein in India. Licence was also granted to use certain specified trade marks in the territory subject to any existing license which third parties held at the date of agreement. The payment to be made to the Swiss company was in terms of percentage of the net sale price of the product sold by the Indian company. It was 5% towards technical consultancy and technical service rendered and research work done, 3% towards cost of raw materials used for experimental work, and 2% towards royalties on trade-marks used by the assessee. The agreement also provided that the assessee would not divulgate any confidential information received under thee agreement to third parties without the consent of the Swiss company and the Indian company could not assign the benefit of the agreement and grant sub-licences of the patents and trade-marks without the written consent of the Swiss company. Upon termination of the agreement for any cause, the Indian company was to cease to use the patents and trade-marks and to return the same to the Swiss company. The duration of the agreement was for five years, but it was liable to cancellation by either party by giving three months' notice. The question which the Supreme Court had to decide was whether contribution other than that part as royalties, because royalties were already allowed as duduction, was admissible as an allowance either under clause (xii) or under clause (xv) of section 10(2) of the Indian Income-tax Act, 1922. Though the Supreme Court took the view that the payments could not be permissible to be deducted as expenditure under section 10(2)(xii), it was held that the contributions were allowable as business expenditure under section 10(2)(xv). Dealing with his this question the Supreme Court observed as follows at page 699 :

'The assessee did not, under the agreement, become entitled exclusively even for the period of the agreement, to the patents and trade-marks of the Swiss company; it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded. The assessee was on that account a mere licensee for a limited period of the technical knowledge of the Swiss company with the right to use the patents and trade-marks of the company.'

12. Negativing the argument on behalf of the revenue that the expenditure incurred by the assessee was of capital nature, the Supreme Court observed thus at page 700 :

'The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period : by making that technical knowledge available the Swiss company did not part any asset of its business nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business.'

13. The salient features of the agreement which indicated that the Swiss company had not sold the secret processes to the Indian company were set out by the Supreme Court as follows at page 701 :

'The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss company to the assessee : (a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period; (b) the object of the agreement was to obtain the benefit of the technical assistance for running thee business; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons; (d) the assessee was expressly prohibited from divulgate information to third parties without the consent of the Swiss company; (e) there was no transfer of the fruits of research once for all; the Swiss company which was continuously carrying on research had agreed to make it available to the assessee; and (f) the stipulated payment was recurrent dependent upon the sales, and only for the period of the agreement.'

14. In view of these facts, the Supreme Court confirmed the decision of the High Court that the contributions and payments made in respect of technical consultancy and technical service rendered and research work done and on account of cost of raw material used for experimental work were allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922.

15. The salient features which have been culled out by the Supreme Court to indicate that the Swiss company had not sold any processes to the Indian company are also present in out case except the fact that the agreement in question is concerned only with royalty and not with expenses incurred in respect of research. The terms of the agreement would, therefor, disclose that when the know-how was being provided in a restricted manner for a restricted use to the company for a period of 10 years, the Austrian company was not absolutely transferring anything to the assessee and on the ratio of the decision of the Supreme Court in Ciba Company's case : [1968]69ITR692(SC) , it is clear that the payment of royalty had to be treated as revenue expenditure. The Tribuanl was, therefore, in error in splitting up the amount of Rs. 1,35,343 and attributing 50% thereof towards acquisition of a capital asset. In view of the decision of the Supreme Court, which, in our view, squarely governs the present case, it will not be possible to accept the argument on behalf of the revenue that the Tribunal was justified in splitting up the payment of royalty.

16. In view of the finding which we have recorded in respect of the first question, the second question referred by the Tribunal does not arise and need not be answered.

17. Coming to the third question relating to the cost of foreign tour amounting to Rs. 21,842, it is contended by Mr. Mehta, appearing behalf of the assessee, that the expenditure was incurred in respect of the authorised trips by the chairman of the company, the managing director of the company and the technical adviser of the company. Our attention has been invited to the resolution of the company, the managing director of the company, which is marked as annexure 'F', passed on 15th February, 1962, at the board meeting. By that resolution the chairman, Mr. Desai, and the managing director, Mr. D. S. Gandhi, were authorised to accept any changes in the two drafts of the agreement, namely, collaboration agreement and licence and loan agreement, which may be mutually acceptable between the company and the Austrian company. The chairman and the managing director were authorised to go to Austria and finalise the agreement and execute the same on behalf of the company. They were also authorised to persuade the Austrian company to lend their trade mark or trade name to the company. The resolution further states that the chairmen and the managing director are authorised to visit the different supplies on the continent and in the U.K. and Messrs. Steyr, Daimler-Puch A.G., Austria, for improving deliveries of the machines and machines and machine tools ordered by the company. With regard to the visit of Mr. Golding, who is the technical adviser, it is stated that he was being sent in order to finalise various technical matters with the Austrian company in connection with the project and that he was also being sent for the selection of machines and machine tools under the Austian company's deferred payment loan and to contact various suppliers and to finalise the technical requirements in respect of the machines to eb supplied by them. Now, it is contended for the assessee that the visit of these three persons became necessary in order to finalise the collaboration make the necessary changes and to sign the agreement and Mr. Golding being the technical adviser, whose presence, according to the learned counsel, was necessary since the agreement itself dealt with the technical know-how. This expenditure, according to the learned counsel, was, therefore, wrongly disallowed.

18. On the other hand, it is vehemently urged on behalf of the revenue by Mr. Joshi relying on the finding recorded by the Tribunal that the expenditure was connected with the initiation of the substantial expansion of the company's business, that the expenditure incurred must be treated as having been incurred for setting up a new project, and where expenditure is incurred for initiating an expansion, the expenditure must partake of the capital nature. Mr. Joshi has relied on certain decisions to which we shall refer later.

19. Now, it appears to us the nature of the travelling expenditure incurred by the chairman, the managing director and the technical adviser of the company would have to be determined in the light of the purpose for which the foreign tour was undertaken. There is no finding nor is it contended on behalf of the revenue that the visits of these three persons were made for any other purpose, and it seems to be an admitted position that they had gone abroad for the purpose for which they were authorised to go by the resolution of the board. It has to be borne in mind that if a collaboration agreement was to be entered into with a foreign firm, for the finalisation of the terms properly authorised high officers would have to be sent, especially when the plans for expansion appeared to be substantially big. As will appear, this expansion necessitated increasing the capital of the company by a large amount. If the result of the agreement itself was not the acquisition of a capital asset, as we have earlier found, it is difficult to countenance an argument that expenditure in the form of travelling expenses which clearly were incidental to the main purpose of securing a profitable and a feasible collaboration agreement would partake of the nature of capital expenditure. No hard and fast rule can be laid down as to whether a given expenditure. But taking into consideration the generally broadly accepted test of an acquisition of an asset of enduring character, even that test, in out view, is not satisfied, because in view of the decision of the Supreme Court, to which we have referred earlier, securing in acquisition of any asset of an enduring character. Preliminary expenditure for securing such an agreement can, in our view, much less be said to have been incurred for the purposes of acquisition of capital asset.

20. Mr. Mehta has relied on a decision of the Gujarat High Court in Sayaji Iron & Engineering Works Pvt. Ltd. v. Commissioner of Income-tax : [1974]96ITR240(Guj) , in which a Division Bench of the Gujarat High Court was called upon to consider as to whether expenditure incurred by a company which was manufacturing electrical hoists and wanted to manufacture electrical hoists with a different design so as to increase the lifting capacity and which has sent two of its directors and the production manager to Germany to acquire the technical know-how and also for the purpose of studying annd obtaining for manufacture of conveyor incurred was disallowed by the Tribunal in that case on the ground that the assessee wanted to manufacture a different item which would result in an expansion of its activites and the expenditure was of a capital nature. The Division Bench took the view that the expenditure had been incurred with a limited purpose, namely, to get an idea as to the design of a hoist and study new and modern technical of manufacturing processes involved therein and no capital asset had been brought into existence or was intended to be brought into existence or was intended to be brought into existence as a ruslt. The expenditure incurred in acquiring technical know-how for manufacturing electrical hoists was, therefore, held to be business expenditure. On facts, in that case, the Division Bench had found that the trip which was undertaken by the two directors and by the production manager was in effect and substance for the purpose of finding out as to whether they should adopt new designs or not and that the directors and the production manager wanted to get an idea as to the new design and the manufacturing processes involved therein. It must be remembered that even though an agreement was entered into between the assessee-company in that case and a foreign firm, that agreement was not acted upon by the parties and yet, the Division Bench held that the expenditure was allowable as revenue expenditure. We must also point out that in that decision the Gujarat High Court has relied upon the decision of the Supreme Court in Ciba Company's case : [1968]69ITR692(SC) . It is clear that this decision supports the assessee and the view taken by the Gujarat High Court has our respectful concurrence. Once the view taken by the Supreme Court in Ciba Company's casee : [1968]69ITR692(SC) is given effect to and it is held that in making payment for taking advantage of know-how from a foreign firm, there is no transfer or acquisition of an asset, in our view, the most logical conclusion which must follow without any difficult is that any expenditure. Merely because one of the purpose of the visit was incidentally to find out which would be the proper machinery to use for the purpose of expansion would not necessarily make it a visit intended solely for that purpose because the primary purpose of the visit was the finalisation of the collaboration agreement. Even if incidentally some machinery has been selected as proper and suitable for the new project, we are not inclined to take the view that the travelling expenses will partake of capital expenditure.

21. There are two decision on which Mr. Joshi has heavily relied. One is the decision of the Gujarat High Court and the other is the decision of the Punjab and Haryana High Court. In Dalmia Dadri Cement Co. Ltd. v. Commissioner of Income-tax , the facts show that an engineer had gone abroad on behalf of the assessee-company to inspect the machinery which was to be purchased by the assessee for the extension of the factory of the company and the company claimed the travelling expenses of the engineer as business expenditure. This claim was disallowed by the Income-tax Officer and the Appellate Assistant Commissoner. The Tribunal found that the travelling expenses were connected with the new plant and machinery which were to be installed for extension of the assessee's cement factory and that the assessee-company actually purchased plant and machinery worth one crore of rupees soon after the visit of the engineer of Europe and the Tribunal held that the expenditure was of a capital nature. The Punjab and Haryana High Court took the view on a reference that since the purchase of the said machinery by the assessee-company for the extension of its business was of a capital expenditure and as it was for the completion of that the nature of the expenditure in the form of travelling expenses would be determined by the ultimate purpose for which it was incurred, namely, the purchase of machinery which was a capital asset. Apart from the fact that the decision is clearly distinguishable on facts and we do not consider it necessary to go into the larger question as to whether even in such a case the expenditure incurred by way of travelling expenses could be treated as capital or revenue expenditure, even if we apply the principal which is accepted by the Punjab and Haryana High Court, nemal, that the nature of the expenditure will depend on the nature of the asset acquired, we must come to the conclusion that since the collaboration agreement itself has not resulted in acquisition of any capital asset, preliminary expenditure in the form of travelling expenses incurred inn connection therewith could also not be treated as a capital expenditure.

22. The other decision is that of the Gujarat High Court in Ambika Mills Ltd. Commissioner of Income-tax : [1964]54ITR167(Guj) . That decision also dealt with expenditure incurred on account of travelling abroad. The object of the tour in that case undertaken by the director and the superintendent of the company's mills was found to be to replace the old, out of date and absolute machinery used in the textile mills of the assessee-company by the more modern ones and therefore, the Tribunal had taken the view that the expenditure incurred related to the fixed framework of the profit-making apparatus of the assessee-company and not to the co-ordination of business and, was, therefore, capital expenditure. The conclusion of the Division Bench of the Gujarat High Court is to be found in the last but one paragraph of the judgment, which reads as follwos. (page 188) :

'The finding of fact by the Tribunal, though of an intermediate fact as to the object of the two tours, cannot, as we have already held, be said to be either perverse or not based on evidence or lacking in sanctity and, therefore, wee would not be justified in interfering with it. That being the posisition, it is not possible for us to say that the two tours were undertaken as study tours merely to get acquaintance with new methods of production and new machinery or only for adding to the knowledge of the assessee-company's representatives, and, thereof, the expenses incurred were revenue expenditure. A tour undertaken for the purpose of a preliminary survey of new methods of manufacturing, designing or processing and of new machinery with a view to purchase them, even if not immediately but at a later stage, would be one for the purpose of brining into existence a capital asset and such expenditure would, therefore, be capital expenditurer.' The Division Bench, therefore, seems to have taken the view that if the tour is undertaken as a study tour to get acquaintance with new methods of production and new machinery or for adding to the knowledge of the assessee-company's representives, the expenses incurred would be revenue expenditure but that if a tour is undertaken for a preliminary survey of new methods of manufacturing, designing and processing and of new machinery with a view to purchase them even at a later stage, it would be one for the purpose of bringing into existence a capital asset.

23. Now, apart from the fact that it is not necessary for the purpose of present reference to go into the question as to whether, if a tour is undertaken for the purposes of exploring new methods of manufacturing, designing or processing, the expenses so incurred are of a revenue nature. It is difficult for us to appreciate how the fact that if, an addition, the tour is intended for the purpose of purchasing machinery, the balance would tilt in favour of capital expenditure. We might point out that though this decision in Ambika Mills' case [1964] 54 ITR 167 (Guj) was not cited before the Gujarat High Court in the later decision in Sayaji Iron and Engineering Works Pvt. Ltd's case : [1974]96ITR240(Guj) , there are certain observations therein which run counter to the observation made by the learned judges in the Ambika Mill's case [1964] 54 ITR. In Sayaji Iron & Engineering Works Pvt. Ltd. case [1974] 96 ITR 167. In Sayaji Iron & Engineering Works Pvt. Ltd's. case : [1974]96ITR240(Guj) , after referring to the decision in Ciba Company's case : [1968]69ITR692(SC) , the Division Bench of that court has observed :

'...... we have not been able to appreciate how this decision reference is to the decision of the Punjab and Haryana High Court in Dalmia Dadri Cement Co. Ltd's. case can take he case of the revenue any fruther, because, admittedly, the expenses claimed by the assessee-company as revenue expenses were incurred in connection with the inspection of the machinery to be purchased by the company for expansion of its factory.'

24. The view which, therefore, the Division Bench seems to have taken in Sayaji Iron & Engineering Works Pvt. Ltd's. case : [1974]96ITR240(Guj) is that the tour expenses of the two directors and the production manager of the company for expansion of the factory would partake of revenue expenditure. We are more inclined to agree with the decision of the Gujarat High Court in Sayaji Iron & Engineering Works Pvt. Ltd's. case : [1974]96ITR240(Guj) .

25. We are, therefore, of the considered view that the tax authorities were in error in declining to allow a deduction of Rs. 21,842 on the ground that it was capital expenditure.

26. In the view which we have taken on this question, question No. 4 referred by the Tribunal does not arise and need not be answered.

27. Consequently, the questions referred by the Tribunal are answered as follows :

Question No. 1 :

In the affirmative and that the entire amount of Rs. 1,35,343 was deductible as revenue expenditure.

Question No. 2 :

Does not arise and need not be answered.

Question No. 3 :

In the negative and in favour of the assessee.

Question No. 4 :

Does not arise and need not be answered.

Revenue to pay the costs of the assessee.


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