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income-tax Officer Vs. Universal Electric Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(1985)11ITD577(Kol.)
Appellantincome-tax Officer
RespondentUniversal Electric Ltd.
Excerpt:
.....for a further period of five years. the extension agreement dated 2-12-1975 covered both the old range relays and the new range relays. as a consequence of this agreement, the existing relay department had been expanded to enable the company to manufacture more sophisticated new types of relays. the ito found that the industrial licence previously taken by the assessee for the manufacture of old range relays was also utilised for the manufacture of new range relays and no separate licence was taken for the manufacture of new range relays, that the extension agreement with melco covered the manufacture of old range relays and no independent agreement existed in respect of new range relays, that the power supply for the manufacture of new range relays depended on the power supply.....
Judgment:
1. These two appeals by the revenue against the orders of the Commissioner (Appeals), involving common contentions, are disposed of by this combined order for the sake of convenience.

2. The first common ground pertains to the assessee's claim for deduction in respect of licence fee disallowed by the ITO. By an agreement dated 12-3-1977, the assessee took over the factory of Everlite (P.) Ltd. with effect from 1-12-1976 on leave and licence basis in consideration of an annual fee of Rs. 8,25,000 for the purpose of manufacturing copper enameled wire and aluminum wire. The factory comprised of all lands, buildings, structures, god owns, out-houses, fixtures, plant and machinery and other articles belonging to Everlite (P.) Ltd., together with all rights and benefits of quotas, licences, grants, privileges, agreements, contracts, orders, permits and applications that were and might, during the term of the licence, come in existence or be available and/or obtained for in connection with the operation of the factory. The leave and licence was for an initial period of ten years from 1-12-1976. The ITO found that by paying the annual fee mentioned above, the assessee had acquired the right to sell, transfer and/or dispose of all or any part of the machinery and that the assessee had also acquired the right to use and utilise the trade name and trade mark of Everlite besides acquiring the right to purchase the Everlite factory on the expiry of the licence period, or, prior to that, on payment of Rs. 12 lakhs only. He was, therefore, of the opinion that such rights acquired by the assessee were benefits of an enduring nature. Moreover, the assessee also got an absolute right to purchase the factory at a fixed price of Rs. 12 lakhs, the annual licence fee of which was fixed at Rs. 8,25,000. During the previous year relevant to the assessment year 1977-78, the assessee paid a licence fee of Rs. 2,75,000 which was debited to its accounts under the head 'Rent' and next year that fee amounted to Rs. 8,25,000 being rent for the whole year. Since the ITO was of the opinion that the assessee by spending these amounts acquired a benefit of an enduring nature, he disallowed the assessee's claim for both the assessment years under appeal on the ground that the expenditure was capital in nature.

3. On appeal before the Commissioner (Appeals), it was contended on behalf of the assessee that the ITO was wrong in interpreting the various clauses of the agreement and coming to the conclusion that in accordance with the terms and conditions of the agreement, the assessee had acquired an advantage of an enduring nature. It was urged that none of the clauses conferred any advantage of an enduring nature and the clauses were similar to the usual clauses in any agreement for letting out a factory on leave and licence or tenancy basis. It was urged that the assessee was not the owner of the factory or land or buildings, structures, plant and machinery or trade mark. It was further pointed out that the assessee had not claimed depreciation in respect of any assets belonging to Everlite (P.) Ltd. It was also pointed out that depreciation was actually allowed to Everlite (P.) Ltd., which was the real owner of the assets. It was submitted that as per agreement, the assessee only became entitled to use and run the factory and use the trade mark for a period of ten years only. It was urged that as per agreement, the assessee was entitled to replace the old and outdated plant and machinery for smooth running of the business. It was claimed that the clause giving option to the assessee to purchase the factory after the expiry of licence, could not be considered as an enduring advantage. It was pointed out that even that clause was later modified by a supplementary agreement. Reliance was placed on the decision of the Calcutta High Court in the case of Agarwal Hardware Works (P.) Ltd. v. CIT [1980] 121 ITR 510 and it was claimed that the expenses claimed by the assessee towards payment of licence fee were allowable. The Commissioner (Appeals) deleted the disallowances made by the ITO for both the assessment years under appeal by observing as under : The undisputed facts are that the factory and all assets comprised therein, including the trade mark, are not the property of the assessee. The agreement merely gives the assessee the right to use the said factory and trade mark. For such user, the assessee is obliged to pay the licence fee. The agreement cannot, in any way, be said to be conferring any enduring advantage or for acquisition of any capital asset. The ITO's view is that since the licence was for a period of ten years, the right to use the factory and trade mark for such a long period is an advantage of enduring nature. This view is not tenable. No payment has been made for acquiring any right.

The payment is being made actually for the use. Where the payment is related to the user and is for rent or licence fee, the length of the period is of no consequence. After considering all the facts and circumstances of the case and in view of the decision of the Calcutta High Court cited by the authorised representative. I hold that the disallowance of Rs. 2,75,000 and Rs. 8,25,000 are unjustified. They are, therefore, deleted.

4. Against the said orders of the Commissioner (Appeals), the revenue preferred the present appeals before us. It was contended by the learned departmental representative that the Commissioner (Appeals) was wrong in holding that the expenses incurred by the assessee towards payment of licence fees were in the nature of revenue expenditure. He urged that the assessee, by paying the so-called annual fee, had acquired an absolute right to use and utilise all assets, including the trade mark and trade name of Everlite for ten years. He pointed out that in accordance with the terms and conditions of the agreement made between the assessee and Everlite (P.) Ltd., the assessee had acquired the right to purchase and sell the machinery belonging to the concern, Everlite (P.) Ltd. He pointed out that the assessee had an option to purchase the running factory for a consideration of Rs. 12 lakhs. He, therefore, urged that on consideration of these facts, it could be legitimately presumed that the payment of an annual fee of Rs. 8,25,000 was, in fact, a part consideration towards the purchase price of the entire factory belonging to Everlite (P.) Ltd. He also urged that the acquisition of an absolute right to exploit the commercial assets of Everlite (P.) Ltd. was akin to the acquisition of an advantage of an enduring nature and, accordingly, he submitted that the expenditure incurred by the assessee towards payment of licence fees for both the assessment years under appeal was to be treated as capital expenditure.

The decision of the Calcutta High Court in the case of Agarwal Hardware Works (P.) Ltd. {supra) was distinguishable on facts and, therefore, the Commissioner (Appeals) should not have placed reliance on it. The learned counsel for the assessee, on the other hand, supporting the orders of the Commissioner (Appeals), contended that the payments so made by the assessee were in the nature of payments of ordinary rent relatable to user of commercial assets of the concern, Everlite (P.) Ltd. He urged that no lump sum payment was made and what was paid by the assessee was in the nature of monthly rent similar to rent payable for occupying and utilising any assets belonging to others. The learned counsel for the assessee vehemently urged that none of the clauses referred to by the ITO namely Clauses 4(vi), 4(viii) and 4(x) conferred any advantage of an enduring nature to the assessee and that the assessee had not become owner of the assets of Everlite (P.) Ltd. as a result of the agreement entered into between the assessee and Everlit0e (P.) Ltd. The learned counsel for the assessee pointed out that even during the period of tenancy, depreciation on the assets was claimed by Everlite (P.) Ltd. as owner and that was allowed by the 1TO. He took us through the contents of Clause (x) of the agreement and pointed out that the ITO had not taken into consideration the entirety of the terms and conditions enumerated in the said agreement. He also pointed out that in case the assessee decided to purchase the Everlite factory prior to the expiry of the licence period, it would have not only to pay Rs. 12 lakhs but also to meet all the outstanding of the financial institutions and banks as on that date including interest accrued up to that date. He, therefore, urged that the ITO was wrong in coming to the conclusion that the assessee was entitled to purchase the assets of Everlite (P.) Ltd. at a nominal consideration of Rs. 12 lakhs only. The learned counsel for the assessee took us through the observations made by the Calcutta High Court in the case of Agarwal Hardware Works {P.) Ltd. (supra) and contended that by incurring expenditure towards payment of licence fee, the assessee had acquired a mere benefit which could not be regarded as capital expenditure.

5. We have heard the rival submissions, gone through the various Clauses of the agreement entered into between the assessee and Everlite (P.) Ltd. and considered the facts on record. It is. an admitted fact that the assessee entered into the said agreement with Everlite (P.) Ltd. for utilisation of the commercial assets belonging to the latter concern on leave and licence basis on condition of payment of an annual fee of Rs. 8,25,000. There was no such clause in the aforesaid agreement, from which it could be inferred that the assessee had become an absolute owner of the assets of Everlite (P.) Ltd. The assessee also had not claimed any depreciation on the assets. On the contrary, Everlite (P.) Ltd. had claimed depreciation on the assets and that was allowed by the revenue. The fact that no lump sum payment was made by the assessee to Everlite (P.) Ltd., was not controverted by the learned departmental representative. All these facts go to suggest that the assessee, by paying an annual fee of Rs. 8,25,000, became entitled to exploit the commercial assets of Everlite (P.) Ltd. for a limited period of ten years. It is true that as per agreement, the assessee acquired the right to replace, purchase and/or sell a part of the existing machinery but that was for the purpose of smooth running of the business of the assessee. Reliance may be placed on the decision of the Supreme Court in the case of Gotan Lime Syndicate v. CIT [1966] 59 ITR 718, wherein it has been observed by their Lordships of the Supreme Court that it is not the law in every case, that if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure. In the instant case, as we see, the licence fee payable under the terms and conditions of the agreement was of a recurring nature for exploitation of the commercial assets of Everlite (P.) Ltd. and was not at all related to any fixed or capital sum or the capital value of such assets. It could not, therefore, be said that by making payment of the said amount, the assessee acquired or brought into existence any asset of an enduring advantage or benefit for its business. We would, therefore, hold that the assessee incurred these expenses for the two assessment years under appeal wholly and exclusively for the purpose of its business namely, for the manufacture of copper enameled wire and aluminum wire. Such expenses were, therefore, an admissible deduction while computing the business income of the assessee. We would, accordingly, uphold the orders of the Commissioner (Appeals) on this point.

6. The next common ground pertains to the allowability of the assessee's claim for relief under Section 80J of the Income-tax Act, 1961 ('the Act') in respect of new range relay department. The relay department was established in the year 1970 and production began in 1970-71. Up to March 1976, very limited types of relays were manufactured to cover the requirement of the distribution system ranging between II kv. and 33 kv. For this, a collaboration agreement was entered with Melco of Japan on 30-7-1968. Another agreement (entitled 'Extension of Technical Assistance Agreement for Relay Project') was made on 2-12-1975 between Melco and the assessee. By this agreement, the original agreement was extended for a further period of five years. The extension agreement dated 2-12-1975 covered both the old range relays and the new range relays. As a consequence of this agreement, the existing relay department had been expanded to enable the company to manufacture more sophisticated new types of relays. The ITO found that the industrial licence previously taken by the assessee for the manufacture of old range relays was also utilised for the manufacture of new range relays and no separate licence was taken for the manufacture of new range relays, that the extension agreement with Melco covered the manufacture of old range relays and no independent agreement existed in respect of new range relays, that the power supply for the manufacture of new range relays depended on the power supply received in the meter department and old range relays department, and that the air-compressor and pneumatic machine were used for the manufacture of components both for old range relays and new range relays. These facts led the ITO to believe that the so-called expansion for production of new range relays was not a separate unit and it was mere expansion of the old unit. He, therefore, rejected the assessee's claim for carry forward of Rs. 1,19,003, being deficiency under Section 80J.7. On appeal to the Commissioner (Appeals), it was contended on behalf of the assessee that the reasons given by the ITO were not correct and they did not show that the new industrial undertaking had not come into existence. It was pointed out that there was a substantial expansion of the existing undertaking. The licence granted by the Government of India was for effecting substantial expansion. Copies of the letter of intent dated 14-5-1976 and licence dated 27-2-1978, which had been filed before the ITO, were also referred to at the time of hearing of appeal by the Commissioner (Appeals). It was pointed out that the original licensed capacity of 23,750 was allowed to be substantially expanded to 30,000. The letter of intent and the licence were issued on the basis that there was going to be substantial expansion of the capacity. It was contended that relief under Section 80J was available in a case where substantial expansion of the existing capacity took place by setting up new plant and machinery and/or undertaking. In case of substantial expansion, there could not be any question of obtaining any fresh industrial licence. The reason given by the ITO that the new relays could not be manufactured if the old licence was cancelled, was untenable. There is nothing, which in any way debars a person from setting up different undertakings at different times under the same licence and merely because such undertakings are under the same licence, it cannot be said that such undertakings are part and parcel of the original undertaking. It was submitted before the Commissioner (Appeals) that what had to be judged was whether the assessee had made substantial capital expenditure on new plant and machinery and building for producing additional goods by substantial expansion employing fresh capital. The details of the total expenditure incurred on buildings, plant and machinery, etc., showed that substantial expenditure was incurred by the assessee. Similarly, the reason that under the old agreement with the collaborator new range relays could be made and that there was no independent agreement, could not, in any way, affect the existence of the new industrial undertaking. In fact, under the same agreement, at different times different undertakings could be set up and started. It was submitted that similarly, the assessee's claim could not be disallowed merely because during the relevant accounting year, independent power supply was not there. It was not necessary for an industrial unit to have its own independent power supply. The unit could always take such power from other sources. It was further submitted that the ITO had referred to the utilisation of some air-compressor and pneumatic machine in the new undertaking but he had completely ignored the fact that the value of such compressor and pneumatic machine was far below the statutory percentage of 20. The authorised representative went on to submit that the ITO had completely ignored the basic facts and lost sight of the fact that there was substantial expansion of the production by establishing a new undertaking and that the licence and the letter of intent granted to the assessee for effecting such expansion were not properly considered by the ITO. Reliance was placed on the decision of the Calcutta High Court and the Supreme Court in the case of CIT v. Indian Aluminium Co.

Ltd. [1973] 88 1TR 257 and CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367 for the proposition that where substantial capital expenditure is made on new building and plant and machinery for substantially increasing production, relief under Section 80J could not be denied.

The Commissioner (Appeals), after considering the submissions made before him, held as under: I am of the view that the claim of the assessee should be allowed.

It is evident from the facts on record and the submission of the authorised representative, that substantial capital expenditure was incurred on new building, plant and machinery. The licence and the letter of intent were also given for substantial expansion. Applying the ratio of the decision cited by the authorised representative to the facts of the assessee's case, I hold that the assessee-company is entitled to relief under Section 80J in respect of the new range relays department. The ITO is, therefore, directed to verify the value of the air-compressor and pneumatic machine said to have been used in the flew undertaking. If the value of the air-compressor and pneumatic machine is found to be less than 20 per cent, as provided in the section, admissible relief under Section 80J should be granted, 8. Before us, it was contended by the learned departmental representative that the Commissioner (Appeals) had not taken into consideration the reasons given by the ITO for coming to the conclusion that the assessee was not entitled to relief under Section 80J. He urged that although new machinery were installed for the manufacture of new range relays in the existing business of the assessee, but that fact alone was not enough for coming to the conclusion that the assessee set up a new independent unit and, therefore, the ITO was right in rejecting the assessee's claim. He also urged that there was no substantial expansion. The learned counsel for the assessee, on the other hand, reiterated the same contentions as were advanced before the Commissioner (Appeals) and placed reliance on the decision of the Calcutta High Court in Indian Aluminium Co. Ltd.'s case (supra) and the decision of Supreme Court in Indian Aluminium Co. Ltd.'s case (supra) and the cases of Indian Aluminium Co. Ltd. v. CIT [1983] 140 ITR 114 (Cal.) and CIT v. Shree Digvijay Cement Co. Ltd. [1983] 144 ITR 532 (Guj.).

9. There is no dispute about the fact that the assessee incurred substantial capital expenditure on installation of plant and machinery for the manufacture of new range relay. The Commissioner (Appeals) has recorded a finding of fact that such machinery was installed in a new building. New range relay was a new type of production that was achieved by the assessee by installation of new machinery. In the case of Indian Aluminium Co. Ltd. (supra), the assessee made extension to the existing centres at Belur and Alupuram and installed new plant and machinery there, as a result of which production of aluminum ingots went up by double. On these facts the Calcutta High Court held that the assessee was entitled to deduction under Section 15C of the Indian Income-tax Act, 1922, and the Supreme Court affirmed that decision of the Calcutta High Court. Then, again the Calcutta High Court in the case of Indian Aluminium Co. Ltd. (supra) held that where evidence shows that a new unit has not been formed by the splitting up or reconstruction of the existing unit, the building or machinery for the unit are all new and the new unit is financed by additional capital, it would be entitled to relief under Section 80J. The Gujarat High Court in the case of Shree Digvijay Cement Co. Ltd. (supra) held that in order to be entitled to relief under Section 80J, the following facts had to be established by the assessee, namely, investment of fresh capital, manufacture or production of articles yielding additional profit attributable to the new outlay of capital, employment of requisite labour and separate and distinct identity. In the instant case, as we see, fresh capital was introduced for installation of new machinery in order to manufacture a new type of relay in a separate building. Therefore, bearing in mind the principle laid down in the aforementioned cases and considering the facts of the case, we find no reason to interfere with the orders of the Commissioner (Appeals) on this point.

10 to 25. [These paras are not reproduced here as they involve minor issues.]


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