Subramonian Poti, Actg. C.J.
1. The Income-tax Appellate Tribunal, Cochin Bench, has referred the following two questions, question No. 1 at the instance of the department and question No. 2 at the instance of both the department and the assessee.
2. The questions are :
At the instance of the department:
'(1) Whether, on the facts and in the circumstances of the case, and on the interpretation of the agreement dated February 21, 1969, the Appellate Tribunal was justified and had materials before it in holding that the three manuals acquired by the assessee are books in form as well as in substance and they constitute tools of the trade attracting depreciation and development rebate as plant?'
' (2) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in fixing the cost of the three manuals at Rs. 25,000?'
3. The facts which give rise to these questions are these : The assessee-company was floated as a result of a collaboration agreement between A. Laljee Sons & Company (referred to in this judgment as ' Laljee '), a firm in India and Catalysts and Chemicals Inc. (for brief referred to as ' CCI ' in this judgment), a company in the U.S.A. It was for producing catalysts that the collaboration agreement was reached and this had been approved by the Govt. of India in principle. Annexure A is the agreement between A. Laljee Sons & Company and CCI. The CCI in the States was to provide the company with the overall technical know-how. Since the relative clause is relevant for the purpose of this reference it is useful to extract that clause :
' 2. (b) At the time the shares are offered for subscription, CCI shall deliver to the company such equipment as can only be obtained outsideIndia and having a value equal to U.S. $ 1,05,000 and being the sum equivalent to the par value of 7,875 shares of Rs. 100. At the same time, the company shall further issue to CCI 1,500 shares as fully paid up shares of a par value of 1,50,000 rupees (representing the rupee equivalent of U.S. $ 20,000 at the official rate of exchange of 7.50 rupees for each U.S. dollar) as a down payment to CCI for agreeing to provide to the company all its existing know-how, patents and processes and trade-mark rights in relation to the catalysts listed above with the exception of the catalystic reforming catalysts, with further payments to be made in accordance with paragraphs 2(c) and 5 herein.'
4. In return for the technical know-how the CCI was to be paid a price of U.S. $ 1,70,000 free of Indian taxes. This is covered by para. 4 of the agreement which runs :
' The parties agree to cause the company to pay to CCI for its know-how, patents, processes and trade-mark rights the further amount of U.S. $ 1,70,000 free of Indian taxes in four instalments as follows:
$ 40,000 when commercial manufacturing commences.
3 40,000 twelve (12) months after the manufacturing has commenced.
$ 45,000 twenty-four months (24) after the manufacturing has commenced.
3 45,000 thirty-six (36) months after the manufacturing has commenced.
Such payments shall be in addition to the U.S. $20,000 referred to in paragraph 2(b) and the U.S. $ 60,000 referred to in paragraph 2(c).'
5. Evidently the obligation of the CCI, under the agreement, was : (1) providing technical know-how consisting of a complete description of the composition of all catalysts, raw materials and their specifications, quality control tests, engineering drawings of all process schemes, etc.,(2) during the duration of the agreement the company was to be provided with the additional know-how patents, etc., and (3) qualified Indian personnel was to be trained by CCI by sending to India qualified CCI personnel. The equivalent of the amount of $ 1,70,000 was a sum of Rs. 18,75,000.
6. The Govt. of India approved the agreement in principle. The company was floated. On 4th May, 1970, Sri Laljee on behalf of the assessee-company received intimation from the CCI requesting him to go over to the U.S. so that he may take over the technical know-how manuals, finalise the factory and equipment designs, training of personnel, etc. On June 29, 1970, three books or manuals containing information of the necessary technical details in the production of catalysts way received by Sri Laljee. It was recorded in the letter that the three, manuals were for the exclusive use of the Indian company and no portion thereof may be disclosed to other persons.
7. For the assessment year 1971-72, the corresponding accounting year for which was that ending on December 31, 1970, the assessee-company filed a return showing a net loss of Rs. 21.03 lakhs. In arriving at this loss an amount of 15% on the sum of Rs. 18.75 lakhs paid to CCI by the assessee-company under the terms of the contract was claimed by way of development rebate and depreciation. The case of the assessee was that the above said amount of Rs. 18'75 lakhs represented the value of books containing technical know-how and books being 'plants' within the meaning of Section 43(3) of the I.T. Act, development rebate and depreciation could be claimed thereon. The ITO did not agree with this. He was of the opinion that technical know-how was not a tangible asset within the meaning of Section 33 of the I.T. Act and so the claim was not admissible. Before the AAC it was argued that Rs. 18,75,000 represented the value of the technical know-how purchased by the appellant and that the technical know-how was in the shape of books. But the AAC felt that what were acquired were not books, but a valuable right covering the right to patents, processes and trade-marks and, therefore, there was no provision for depreciation and development rebate in regard to the value of such acquisitions. The matter was taken to the Appellate Tribunal by the assessee. Ground No. 3 in the appeal concerned the plea that the technical know-how should have been considered as a plant. Ground No. 4 concerned the refusal of development rebate on the ground that there was no reserve created. Further grounds of appeal were filed by the assessee which were not disposed of by the Tribunal which dealt with the appeals. In the additional ground No. 5 the appellant had taken a point that the expenditure represented a plant within the meaning of Section 43(3). In ground No. 6 it was mentioned that the assessee was praying for the distribution of the impugned amount of Rs. 18'75 lakhs between capital expenditure and expenditure on patent and trade-mark. In ground No. 7 it was submitted that the expenditure should be allowed as a revenue deduction. The Tribunal which did not deal with the additional grounds in its original order passed a further order later.
8. Before the Tribunal the assessee relied on the decision of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd. : 96ITR672(Guj) in support of its case that the amount of Rs. 18'75 lakhs represented the cost of acquisition of books which should be taken as a ' plant '. The Tribunal in considering the questions, whether the manuals which contained the technical know-how were books, applied the following tests: (1) were the manuals in the form of books, (2) were the manuals, books functionally, and (3) were the manuals in substance books, and held that all the three tests were satisfied. If they were books they would fall within the definition of ' plant' and, therefore, development rebate and depreciation could be claimed on the value of books. But the Tribunal also found that the payment of Rs. 18.75 lakhs was made for the right to obtain the know-how with its connected services and was not made merely to obtain the three manuals. It found that by paying Rs. 18.75 lakhs the assessee had obtained ' certain rights ' from the CCI ' one of which ' was ' the right to obtain present as well as the future know-how '. It further found that this right had an independent existence apart from the three manuals which contained the know-how. Consistent with this finding it found that only a part of the cost of Rs. 18.75 lakhs could be considered as the cost of the three manuals. It determined the cost of these books at Rs. 25,000 and allowed depreciation and development rebate thereon.
9. Evidently, the question raised at the instance of the department challenges the view taken by the Tribunal that the three manuals handed over by the CCI to the assessee-company were books. There is also a challenge at the instance of the department to the fixation of the value of the books at Rs. 25,000. There is a similar challenge at the instance of the assessee that the value of the books should not have been fixed at Rs. 25,000. That is the purport of the second question.
10. We will now consider the first of the two questions referred, namely, that referred at the instance of the department. Section 43 of the I.T. Act defines certain terms and one of the terms so defined is that in Section 43(3), namely, 'plant'. According to the definition 'plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purpose of the business or profession. Books would fall within the definition of 'plant' provided they satisfy the qualification that they are 'tools' of the business or profession. The Chambers Twentieth Century Dictionary defines ' book ' as a collection of sheets of paper, etc., bound together or made into a roll either printed, written on or blank. Similar definitions we find in other dictionaries too. So in the larger sense, sheets of paper written or unwritten brought together in a form would be a book, but in the definition of ' plant ' books are referred to in a more restricted sense, restricted by an indication of the functional use of the books. Therefore, it is not every book such as a diary or a cheque book that would satisfy the definition of a book. In the larger sense those could be said to be books but in the sense in which the term is used in the I.T. Act it must be one ' used for the purposes of the business or profession '. In the case of a lawyer books relating to law and allied subjects would fall within the definition. In the case of a medical practitioner books relating to medicines and allied subjects would similarly fall within the definition of books. Thus thedefinition must satisfy as indicated by the High Court of Gujarat in CIT v. Elecon Engineering Co. Ltd. : 96ITR672(Guj) a dual test, that it should be a book in form as well as functionally. To this the Tribunal added a further qualification that in substance also it must be a book.
11. The three manuals which were handed over by the CCI contained all necessary technical information which the CCI wanted to convey to the assessee-company so that the assessee-company may set up its plant, commence its production and standardise and keep the quality of the product. Such information was necessary for the assessee-company and the manual, therefore, satisfied the dual test of form as well as functional utility. The Tribunal was, therefore, right in holding that the three manuals handed over to the assessee-company were books.
12. The second question is quite plain and easy to answer. But learned counsel for the assessee, Sri Ram Pajwani, contends that the entire technical know-how that had to be conveyed by the CCI to the assessee-company were contained in the books and in fact and in truth there was nothing further of any material consequence that was contemplated as in return for the sum of Rs. 18.75 lakhs. According to the counsel the overall technical know-how which was what was bargained for by the assessee-company in return for the sum of Rs. 18'75 lakhs was the content of the three books and as such the cost of the books should be found as Rs. 18.75 lakhs. We are afraid such an argument cannot be accepted for more than one reason. The agreement itself indicates that besides the passing on of the technical know-how the return for the sum of Rs. 18.75 lakhs covered the patent rights as well as the trade-mark rights. Besides these, there was an obligation to pass on additional technical know-how, which the CCI came into possession of, during the period of 5 years. There was also an obligation to train personnel from India in the States, of course, at the assessee's expense and also by sending technical personnel to India, that too at the assessee's expense. It was not as if once the three books were handed over, the CCI could say ' we have given you what you bargained for. You shall not expect anything more from us. We have discharged our obligation under the agreement. You cannot legally enforce any further obligation against us. ' That of course is plainly not the case under the terms of the agreement. Even the additional grounds of appeal before the Income-tax Appellate Tribunal indicate that the assessee had no such case. In ground No. 6 before the Appellate Tribunal, which is referred to in para. 9 of the statement of the case, the assessee has prayed for a distribution of the impugned amount of Rs. 18.75 lakhs between the capital expenditure and expenditure on patent and trademarks. Even apart from the assessee conceding so, the agreement itself is very plain on this.
13. The Tribunal categorically found in its order that the amount of Rs. 18.75 lakhs was not only for the three manuals, but was in return for certain rights from the CCI and one of the rights was the right to obtain present as well as future know-how. There is no reference regarding the correctness of this finding. In fact so long as this finding of the Tribunal remains, there is no scope for considering whether the sum of Rs. 18'75 lakhs was in return for all the. rights under the agreement. That it is for one of many rights is a matter which cannot be challenged now.
14. Therefore, the only question that remains is whether the valuation of the cost of the three manuals at Rs. 25,000 was proper. According to the assessee, in any view of the matter, it must be taken that the transfer of the technical know-how is the most important of the rights that the assessee was entitled to under the agreement and its value must represent the major part of the consideration of Rs. 18.75 lakhs. We notice that the amount of Rs. 25,000 has been determined without reference to facts and such determination is nothing but arbitrary. There is no .support found in the order as to how this sum was so determined. Therefore, to that extent we should accept the contention of both sides. The answer to the question should be in the negative. In this instance we cannot say we have answered either in favour of the revenue or in favour of the assessee. In regard to question No. 1 the answer is in the affirmative, that is, against the revenue and in favour of the assessee.