1. By this reference the Income-tax Appellate Tribunal (hereinafter called 'the Tribunal') has referred for the opinion of this court the following question of law arising out of the order of the Tribunal in the case of the assessed, M/s Crescent Capacitors, New Delhi, for the assessment year 1970-71 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the disallowance of the assessed's claim for deduction of Rs. 20,000 paid to Shri A. C. Gupta as not qualified for deduction as per the provisions of ss. 35(1) and 43(4) or 37(1) of the I.T. Act ?'
2. The assessed was a firm manufacturing capacitors for use of radios and transistors. The previous year of the assessed relevant to assessment year 1970-71 ended on July 31, 1969. The firm consisted of three partners, all of whom were the sons of one A. C. Gupta, who was the founder of the firm. The firm needed a component called 'etched foils' for manufacture of capacitors by it. The assessed approached the Government of India for the grant of an import license to it for importing etched foils. This application of the assessed was rejected and the assessed was required to etch the foils by themselves. The assessed approached the said A. C. Gupta to held it either in getting the import license or to prepare etched foils indigenously. A. C. Gupta, in his letter dated December 20, 1968, wrote to the assessed stating that he was prepared to undertake the research provided the firm agreed to pay Rs. 20,000 to him to cover the cost of labour in the event of success and A. C. Gupta was to pass on the technique as developed by him to the assessed-firm. This offer of A. C. Gupta was accepted by B. Mohan, the partner of the assessed-firm. On behalf of the firm, he, in his letter, dated January 27, 1969, offered to pay Rs. 20,000 to A. C. Gupta subject to two conditions, namely - (i) that in the event of the research of A. C. Gupta not leading to any positive result, the firm was not to be liable to pay any sum to him, and (ii) that the know-how developed by A. C. Gupta was to be given to the assessed-firm on exclusive basis.
3. A. C. Gupta accepted the said offer of the assessed-firm and successfully developed the technique of manufacturing etched foils. The assessed thereon paid a sum of Rs. 20,000 to A. C. Gupta in the previous year relevant to assessment year 1970-71 and claimed its deduction in computing its income for that year. The assessed claimed the deduction on this amount either under s. 35(1)(iv) as an expenditure of capital nature on scientific research relating to the business carried on by the assessed or under s. 37(1) of the I.T. Act, 1961 (hereinafter called as 'the Act'), as expenditure wholly and exclusively incurred for purpose of the assessed's business.
4. The ITO took the view that the assessed had purchased the know how from A. C. Gupta for a consideration of Rs. 20,000 and further that the expenditure in question was capital expenditure. The claim of deduction was accordingly disallowed by the ITO.
5. The AAC, in appeal by the assessed against the assessment order of the ITO, observed that the amount allegedly shown as having been paid by the assessed to A. C. Gupta was indirectly received back by the partners of the firm. A. C. Gupta was a benamidar of the assessed's partners. He thus was of the view that the amount was not actually paid by the firm to A. C. Gupta and the claim was not a genuine one. Regarding the legal position as to the allow ability of the sum in question, he upheld the finding of the ITO that the amount in question could not be said to be an expenditure on scientific research relating to the business carried on by the assessed. The AAC, however, did not consider the claim of the assessed under s. 37(1) of the Act.
6. In the second appeal of the Tribunal, the question of the genuineness of the payment of the sum of Rs. 20,000 in question was not disputed on behalf of the Department as that was also not the case of the ITO. The Tribunal, on an examination of the nature of the payment in question and the relevant provisions, agreed with the finding of the authorities below that the expenditure in question was not allowable under s. 35(1)(iv) of the Act. Regarding its claim under s. 37(1) of the Act, reference was made on behalf of the assessed to certain observations made by the learned authors Knaga and Palkhivala in their commentary on the I.T. Act. The Tribunal, however, rejected the assessed's contention in that regard as well and the disallowance of Rs. 20,000 as made by the authorities below was confirmed by it.
7. The main contention of Shri C. S. Aggarwal, learned counsel for the assessed, is that the departmental authorities have thus come to the conclusion that the expenditure of Rs. 20,000 in question was incurred by the assessed towards the purchase of the technical know-how and it is also not disputed by them that this expenditure was incurred by the assessed wholly and exclusively for purpose of its business. It was contended that the disallowance of the claim by the ITO on the view that the expenditure in question was capital in nature is wholly erroneous and the expenditure in question was revenue expenditure. It was pointed out that the ITO in his assessment order simply observed that the expenditure in question was an expenditure of capital nature without giving any reason whatsoever for that view. The AAC did not at all consider the claim of the assessed under s. 37(1) of the Act and nor did the Tribunal, in fact, consider the claim of the assessed in that regard. It was submitted that the business of the assessed was that of manufacture and sale of capacitors and etched foils were a necessary component of capacitors. It was thus necessary for purposes of carrying on the business of the assessed of the manufacture and sale of capacitors to procure supply of etched foils. the assessed's efforts to import etched foils did not meet with success and the assessed's business had to be closed down if the assessed did not purchase the technical know-how for the manufacture of etched foils by it. It was further submitted that the technology employed in the manufacture of electronic goods is fast developing and is not of use for any considerable period.
8. New methods and techniques are being developed rapidly and keeping these facts in view, the assessed could not be held as having acquired a benefit of enduring nature by the purchase of the technical know-how for the manufacture of etched foils. Thus, the contention goes on to say that viewed in the light of these facts and circumstances of the case, the expenditure in question could not be held to be an expenditure of a capital nature and the same was a revenue expenditure. Reliance was placed by Shri Aggarwal on a number of decision including the one of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT : 124ITR1(SC) .
9. Shri G. C. Lalwani, learned counsel for the Revenue, in reply submitted that the purchase of technical know-how in question by the assessed resulted in a benefit of enduring nature to the assessed as the assessed could utilise the same for a long period for the manufacture of etched foils and that such a view taken by the ITO that the expenditure in question was capital expenditure was justified. He also referred to certain decisions in support of his contention.
10. We have considered the rival contentions and have gone through the various decisions as cited by the two sides. The question as to whether a particular expenditure is revenue expenditure or is capital expenditure depends on the facts of each case and has necessarily to be decided taking in view the full spectrum of facts and circumstances of the particular case. On the facts and circumstances of the case including some stated hereafter and the reasons as stated by Shri Aggarwal, which we need not repeat, and the legal position as emerging from the various decisions cited before us which we will refer to hereafter, we are of the view that the expenditure in question was revenue expenditure and was not capital expenditure.
11. Another important circumstance to be taken note of is that A. C. Gupta had no property right transferable in the technical know-how and had developed the technical know-how in question only as per the requirement of the assessed. No copyright was attached to the technical know-how in question and, as such, this was a case of a payment for obtaining certain knowledge and there was no property right of A. C. Gupta in the technical know-how which was transferred to the assessed.
12. It is also worth mentioning here that the total taxable income of the assessed-firm for the assessment year in question was assessed at Rs. 97,994. The smallness of the payment of the sum of Rs. 20,000 having regard to the volume of the business of the assessed is also a slight circumstance to be taken into consideration in judging the nature of the expenditure in question. Coming to the case-law cited at the Bar, the Supreme Court in the case of Empire Jute Co. Ltd v. CIT : 124ITR1(SC) , laid down the law on the point as under (headnote) :
'(i) It is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer.
(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessed that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessed's trading operation or enabling the management and conduct of the assessed's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be no revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, thereforee, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
(iii) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency.'
13. Viewed in the light of the law as laid down by the Supreme Court in the said case, on the facts as found and as mentioned by us above, we are of the view that the assessed did not acquire a benefit of any enduring nature by the purchase of the technical know-how in question and the expenditure was incurred by it wholly and exclusively for the carrying on of its business.
14. In the case of Praga Tools Ltd. v. CIT : 123ITR773(AP) [FB], the Andhra Pradesh High Court observed that where the expenditure has direct nexus or relation to the carrying on or the conduct of the business of the assessed, it must be regarded as an integral part of the profit-making process and in such a case the expenditure must be held to be a revenue expenditure. In that case one of the considerations that weighed with the Andhra Pradesh High Court in holding the expenditure in question as revenue expenditure was the fact that accessorises, designs and technical know-how with latest modifications which were sought to be transferred had no property right in them which was transferable. The court duly took note of the fact that the assessed was free to make use of the technical know-how after the expiry of the period of the agreement also. The court observed that there was no property right in the know-how which is transferable and the importing of special knowledge and technical know-how by the foreign collaborators to the assessed-company was just like a teacher selling his skill or knowledge to his pupil. This decision of the Andhra Pradesh High Court thus supports our view inasmuch as the expenditure in question was incurred by the assessed in the present case for the purchase of the technical know-how which was to be made use of and was used by the assessed for the manufacture of capacitors in the relevant previous year, which was the only business of the assessed and without the acquisition of which knowledge the assessed could not have carried on its business and the business of the assessed would have to be closed down. Having regard to the fact that the process involved in the etching of foils cannot be considered to be a highly sophisticated process and further in view of the fact that the techniques involved in the manufacture of such goods used in electronic articles are fast developing, yielding place to new techniques, the assessed could not be held to have acquired any benefit of an enduring nature.
15. The decision of the Supreme Court in the case of CIT v. Ciba of India Ltd. : 69ITR692(SC) , was also considered by the Andhra Pradesh High Court in its aforesaid decision and we quote below with approval the observations of the Andhra Pradesh High Court in the said case while interpreting the decision of the Supreme court in Ciba's case : 69ITR692(SC) :
'This decision is an authority for the proposition that where an expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment, the aim and object of the expenditure would determine its character and nature. The source or the manner of the payment would then be of no consequence. Where the expenditure is so related to the carrying on or conducting of the business that it might be regarded as an integral part of the profit-making process, it should be held to be revenue expenditure. However, if the purpose and aim of the expenditure is to acquire an asset or a right of a permanent character, the procession whereof is a condition precedent to the commencement or continuance of the business, the expenditure would be of a capital nature.'
16. The Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT  144 ITR 443, held that the acquisition of the right to draw upon the technical knowledge of the foreign companies for a limited period of 15 years for the purpose of carrying on its business does not amount to acquiring any asset or advantage of an enduring nature for the benefit of its business and the payments made by the assessed therein under the agreements to a foreign collaborator were revenue in nature. The object of the agreements therein, which were for a period of 15 years, was to obtain the benefit of the technical assistance for running the business and therein the permission was granted to the assess subject to rights actually granted or which may be granted after the date of the agreements to other persons though outside India and the foreign companies had agreed to make their research and advantage available to the assessed.
17. This is what the Calcutta High Court said on the point at issue in the case of CIT v. Hindusthan General Electrical Corporation Ltd. : 81ITR243(Cal) (headnote) :
'One of the primary rules for determining whether a particular expenditure is a revenue or capital expenditure is that the court, from the terms of the agreement between the parties and from the surrounding circumstances, has to ascertain the purpose for which it is being incurred. If the expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process, it should be held to be a revenue expenditure. Should, however, the purpose be the acquisition of an asset or a right of a permanent character the possession whereof is the condition precedent or the prerequisite to the commencement or continuance of the business, the expenditure would be a capital expenditure.
There is no property right in 'know-how' that can be transferred, even in the limited sense that there is a legally protected property interest in a secret process. Special knowledge or skill can indeed ripen into a form of property in the fields of commerce and industry, as in copyright, trade marks and designs and patents and where such property is parted with for money, what is received can be, but will not necessarily be, a receipt on capital account.'
18. In the case of Tribunal Engineering Works Ltd. v. CIT : 136ITR340(Delhi) the assessed paid a lump sum of Rs. 4 lakhs for the purchase of technical know-how and manufacturing data to be used by it for a period of ten years. It was also found that the payment was for the starting of an individual business by the assessed, yet it was held that these were not such circumstances which were determinative of the nature of the nature of the payment. It was no doubt found in that case that although the manufacturing data had become the absolute property of the assessed, the copyright remained vested in the foreign collaborators. The assessed was also prevented from disclosing to any one without the written consent of the foreign collaborators who were also free to use the know-how in any country other than India during the currency of the agreement between the parties after the expiry of the period of ten years or on the termination of the agreement, whichever was earlier. On a totality of these facts, it was held that the expenditure of Rs. 4 lakhs paid in lump sum by the assessed towards the acquisition of the technical know-how was revenue expenditure. This authority is of help to the case of the present assessed for a limited purpose that the fact that the payment is for the purchase of a particular know-how which the assessed may make use of for a number of years and in that sense he may have a benefit of an enduring nature is by itself not a determinative or sufficient fact to hold that such an expenditure is capital expenditure and further such an expenditure may still be a revenue expenditure unless there are other facts and circumstances leading to a contrary conclusion.
19. As against the aforesaid decisions, Shri G. C. Lalwani, learned counsel for the Revenue, referred us to three decisions, namely, (i) Addl. CIT v. Southern Structurals Ltd. : 110ITR890(Mad) , (ii) Jonas Woodhead & Sons (India) Ltd. v. CIT : 117ITR55(Mad) and (iii) Ram Kumar Pharmaceutical Works v. CIT : 119ITR33(All) . It will suffice to say that these judgments were given on the facts and circumstances of their respective cases and none of them bears any considerable similarity to the facts of the present case and are of no help to the case of the Revenue.
20. In conclusion we hold that the expenditure in question was revenue expenditure and the same having been wholly and exclusively incurred for purpose of the business of the assessed, the assessed was entitled to its deduction under s. 37(1) of the I.T. Act, 1961. We accordingly, answer the question in the negative, i.e., in favor of the assessed and against the Department. In view of the facts and circumstances of the case, we leave the parties to bear their own costs.