1. The following question has been referred to us for our opinion :
'Whether, on the fats and circumstances of the case, the Tribunal was right in holding that out of the sum of Rs. 21,232, the expenditure incurred in connection with technical know-how for manufacturing electric hoists was capital expenditure ?'
2. The question arises in the following circumstances. The relevant assessment year is 1963-64. The assessee is a private limited company carrying on the business of manufacturing, among other items, electric hoists of a particular lifting capacity. It, however, intended to manufacture electric hoists with a different design so as to increase the lifting capacity. In order to acquire the technical know-how and also for the purposes of studying and obtaining training for the manufacture of conveyor leaders, two directors and the production manager went to Berlin, Germany. It appears that the assessee entered into an agreement with M/s. Limes Ltd., Berlin, East Germany, who were the agents of M/s. VEB Maschinenfabrik and Eisengieseerei Dessan. The two directors and the production manager went to Berlin in accordance with the said agreement. Before the Income-tax Officer in the course of assessment proceedings, the assessee-company claimed that the expenditure of Rs. 21,232 incurred in connection with the foreign tour of the two directors and the production manager was in the nature of revenue expenditure. However, the Income-tax Officer rejected this claim as he was of the opinion that this was incurred in connection with a new line. In the appeal by the assessee before the Appellate Assistant Commissioner, this claim was again negatived. The assessee, therefore, took the matter in further appeal before the Tribunal. However, at the time of hearing, the assessee conceded that the expenditure incurred in connection with the study of technical know-how of conveyor leaders was in the nature of capital expenditure. The assessee pressed his claim in respect of the expenses incurred in connection with the study of technical know-how for the manufacture of hoists of a different design and larger capacity. The break-up of the aggregate amount of Rs. 21,232 was till then not made and is still required to be made in view of the opinion in this reference. The claim of the assessee did not find favour with the Tribunal, as it found that the assessee wanted to manufacture electric hoists of a particular type which the assessee was not manufacturing earlier and the visit of the two directors and the production manager abroad was necessitated for acquiring technical know-how and the study of actual manufacture. The Tribunal, therefore, held that the assessee wanted to manufacture altogether a different item which would result in expansion of its activities and, therefore, the expenditure in question was in the nature of capital expenditure. The Tribunal, therefore, rejected the appeal of the assessee. However, at the instance of the assessee, the question set out hereinabove has been refereed to us for our opinion.
3. At the time of hearing of this reference, Mr. J. P. Shah, the learned advocate, appearing on behalf of the applicant-assessee has urged the following two contentions :
'1. The Tribunal was clearly in error as it did not apply the real test to determine whether a particular expenditure is a revenue or a capital expenditure, and that test should be to ascertain the purpose for which the expenditure is incurred.
2. Having regard to the fact that the expenses were incurred for a purpose which is an integral part of the profit earning assets, it must be held to be a revenue expenditure.'
4. On behalf of the revenue these contentions were challenged and it was urged that, as the expenses have been incurred in connection with the proposed expansion of the activities of the assessee-company, they should necessarily be held to be in the nature of capital expenses.
5. The Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd. was concerned with a question, whether the contribution made by the assessee-company, in that case, for purposes of scientific research to be carried out by the principal parent-company, Ciba, Basle, was admissible as deduction under sections 10(2)(xv) of the Indian Income-tax Act, 1922. The parent-company, Ciba Basle Ltd., was engaged in the development, manufacture and sale of medicinal and pharmaceutical preparations and it carried on business in India of selling its products through a subsidiary company called Ciba (India) Ltd. After the incorporation of the assessee-company, the activities of the parent-company in India were bifurcated and the pharmaceutical section was taken over by the assessee-company, viz., Ciba of India Ltd., which was originally floated in the name of Ciba Pharma Ltd. The other lines of the business relating to dyes and chemicals were continued by the subsidiary company, viz., Ciba (India) Ltd., the name whereof was later on changed to Ciba Dyes Ltd. The Supreme Court, on a consideration of the fact that the assessee-company acquired merely a right to draw for the purposes of carrying on its business as manufacturer and dealer of pharmaceutical products upon the technical knowledge of the parent-company for a limited period under the agreement between the said two companies, held that by making technical knowledge available, the parent-company did not part with any assets of its business not did the assessee acquire any assets or advantages of an enduring nature for the benefit of its business. It, therefore, held that the contribution was allowable as business expenditure under section 10(2)(xv) and not under section 10(2)(xii).
6. The ratio of the decision of the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd., was applied by the Calcutta High Court in Commissioner of Income-tax v. Hindusthan General Electrical Corporation Ltd., where it was concerned with the payments made by the Hindusthan General Electrical Corporation Ltd., which was the assessee-company before the court, to M/s. Simplex Electrical Company Ltd., of England for acquiring certain rights to manufacture and sell in India the products of 'Simplex' on the terms and conditions agreed upon. According to the agreement between the said assessee-company and M/s. Simplex Electric Company Ltd., the assessee-company was liable to pay to Simplex, the cost which included freight, transport and insurance charges of preparing and providing prints, designs, drawings, specifications, instructions and other information and of supplying patterns and tools upon invoices in respect thereof. Under the relevant assessment year 1959-60 the assessee-company paid to Simplex Rs. 5,360 for cost of preparing and providing prints, designs, drawings, etc., over and above a sum of Rs. 13,938 being the amount of royalty based on specified percentages. The Income-tax Officer allowed deduction of Rs. 5,360 but disallowed the claim of deduction for Rs. 13,938 on the ground that it was in the nature of capital expenditure. The Appellate Assistant Commissioner however, reversed this order of the Income-tax Officer and allowed the claim of the Company. The Tribunal confirmed the order of the Appellate Assistant Commissioner. In a reference to the Calcutta High Court at the instance of the Commissioner of Income-tax, the Division Bench of the Calcutta High Court held :
'The sum of Rs. 13,938 was an expenditure of a revenue nature and was accordingly allowable as a deduction in computing the business profits of the assessee. There were certain striking similarities between certain clauses in the agreement in the instant case and that in the case in Commissioner of Income-tax v. Ciba of India Ltd., wherein the Supreme Court held that the contribution made by the Indian company to the foreign company was allowable as expenditure under section 10(2)(xv), namely, (1) the agreement was for a definite term liable to be terminated before the end of the term in certain eventualities, (2) the object was to enable it to commence and continue the manufacture in India of all types of Simplex products, (3) the licence was granted subject to the rights actually granted or which may be granted after the date of the agreement to other persons, (4) it shall treat as secret and confidential and not disclose or permit the disclosure of, any matter provided or made available by Simplex, (5) there was no transfer of the fruits of research, but Simplex should make available to it the 'know-how' and give advice and assistance in the manufacture of the products, and (6) the stipulated payment of royalty was recurrent and entirely dependent on Simplex products actually manufactured by it.'
7. Mr. Justice Sankar Prasad Mitra (as he then was), speaking for the court, observed as under in his judgment :
'Broadly speaking, therefore, it may be observed that one of the primary rules for determining whether a particular expenditure is a revenue or a 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. It 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 pre-requisite to the commencement or continuance of the business, the expenditure would be a capital expenditure.'
8. The Allahabad High Court in Motor Sales, Lucknow v. Commissioner of Income-tax, was also concerned with a similar question, where the assessee-company was obliged to maintain at its own expense an organisation for the sale of the vehicles and this included an adequate staff of trained salesmen and a staff of trained technical personnel, according to the agreement with Telco for the sale of Mercedes Benz trucks. The assessee-company claimed a deduction of Rs. 7,242 paid under the training scheme for the assessment year 1961-62. As the claim was negatived all throughout up to the Tribunal level, a reference was sought to the High Court, and the Division Bench of the Allahabad High Court held :
'The amount was paid by the assessee as a charge for the training of apprentices and the fact that Telco intended to use the amount for construction of a hostel was a matter of application of funds received by it and would not change the nature of payment made by the assessee. Trained personnel were necessary for the assessee's business under its agreement with Telco and also because it induces better sales. The payment was made wholly and exclusively for purposes of business of the assessee and was not of a capital nature and was allowable under section 10 (2)(xv).'
9. In Security Printers of India (P.) Ltd. v. Commissioner of Income-tax, the court was concerned with a case of a company which intended to commence manufacturing activity of security printing such as printing of cheques, drafts, fixed deposit receipts and like papers for Indian banks. As this type of manufacturing was never being done before in India, the managing director, one Mr. M. C. K. of a company carrying on business of press in India, conceived the idea of executing these printing jobs in India in collaboration with a London company and, accordingly, he entered into an agreement with the London company to float a private company in this country. The assessee-company was, accordingly, floated. According to the agreement between the assessee-company and the London company, it was agreed that a representative of the London company would be appointed as director of the assessee-company to look after the security arrangements, and, accordingly, one Mr. M. C. M. was appointed as a director. The said Mr. M. C. M. was appointed as the director of the assessee-company representing the Indian group of shareholders. In the assessment year 1958-59, the assessee-company claimed deduction of a sum of Rs. 70,437 comprised, inter alia, of travelling expenses of the said Mr. M. C. K. for trip to England to study techniques of security printing. The claim was disallowed by the Income-tax Officer. However, in appeal the Appellate Assistant Commissioner allowed the said claim, the Tribunal was of the opinion that the expenses incurred by Mr. M. C. K. in connection with his trip to England should be regarded as capital in nature. On a reference to the High Court of Allahabad, the Division Bench held that any expenditure incurred by a director or an agent of a company with his trip abroad to study techniques for the activities to be undertaken before their actual commencement, is expenditure with a view to acquaint oneself with new and modern techniques and, therefore, should be considered revenue in character as they are incurred in order to enable the company to earn greater profits in a competitive market and not to acquire a new asset.
10. The expenses with which we are concerned in this reference are, as found by the Tribunal, in connection with the trip of the two directors and the production manger to Germany to get an idea as to the new designs of hoists to be manufactured and the process involved in the manufacture of the said item. It is also common ground between the parties, as is clear from the order of the Tribunal, that the assessee-Company was manufacturing amongst other items electric hoists of a particular lifting capacity and that it intended to manufacture electric hoists with a different design so as to increase the lifting capacity and in order to acquire a technical know-how and also for purposes of studying manufacturing process of such items as well as for manufacturing of conveyor leaders, that these two directors and the production manager went to Berlin. Before these three persons went abroad, the assessee-company and Messrs. Veb Maschinenfabrik and Eisengieseerei Dessan as represented by Limex Ltd., entered into an agreement for technical collaboration, though by the consent of both the parties to the said agreement, it was not acted upon. In other words, therefore, the two directors and the production manager went abroad for purposes of finding out whether it would be profitable for the company to adopt a new design of hoists with increased lifting capacity, which they intended to manufacture. As said by Lord Clyde in Robert Addie & Sons' Collieries Ltd. v. Commissioners of Inland Revenue :
'It is necessary accordingly to attend to the true nature of the expenditure, and to ask one's self the question, is it a part of company's working expenses - is it expenditure laid out as part of the process of profit-earning - or, on the other hand, is it a capital outlay - is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ?'
11. As held by the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd., having regard to the terms and conditions contained in the contract in the case before the court, no permanent rights or benefits came into existence as a result thereof as the parent-company did not agree to part with any of its properties in favour of the assessee-company did not agree to part with any of its properties in favour of the assessee-company. Mr. Shah was, therefore, right that even according to the terms and conditions of the contract, which was ultimately not acted upon by the consent of the parties thereto, there was no transfer of property intended, nor conferment of rights or benefits of permanent endurance on the assessee-company herein and, therefore, on the ratio of Commissioner of Income-tax v. Ciba of Indian Ltd., even if it is held that the expenses were incurred by going abroad in pursuance of the said agreement, it could not have been the expenses in the nature of capital. The expenses were incurred, as rightly contended by Mr. Shah, by the assessee-company for purposes of getting an idea as to what should be the design of new item of hoist to be manufactured and the nature of process involved in the manufacture thereof and not with view to acquire rights or benefits of a permanent character. It was, as tersely described by Mr. Shah, ultimately with a view 'to increase the profits of the assessee-company', as it was already engaged in manufacturing hoists of a particular capacity. Mr. Shah was right when he made a grievance that the Tribunal had lost sight of the fact that this trip was with a limited purpose, viz., of getting an idea as to the design of hoist and to study new and modern techniques of manufacturing process involved therein and thereby no capital asset was in fact brought into existence or was intended to be brought into existence.
12. Mr. K. H. Kaji, the learned advocate on behalf of the revenue, relied on the decision in Dalmia Dadri Cement Co. Ltd. v. Commissioner of Income-tax (No. 1), where an engineer had been sent abroad on behalf of the assessee-company to inspect the machinery which was to be purchased by the company for the expansion of the factory of the company and the expenses incurred were disallowed on the ground of their capital nature. Apart from the fact that the Punjab and Haryana High Court had not the benefit of the decision of the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd., and a number of decisions thereafter of the different High Courts where the principle was extended and applied, as is evident from the decisions cited hereinabove, we have not been able to appreciate how this decision can take the case of the revenue any further, 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 the machinery to be purchased by the company for expansion of its factory. In our opinion, therefore, having regard to the nature of the trip for which the expenses in question were incurred in the case before us, we do not think that it can be successfully established, as was sought to be done by the revenue, that these expenses were not for the purposes of acquiring modern methods of technical production and know-how which are very essential for increasing profits of the company. In any case, the trip, in this particular reference before us, was for purposes of getting an idea as to the new designs which were to be adopted and the manufacturing process involved therein. Ultimately, the agreement entered into between the assessee-company and Messrs. VEB was not acted upon by the parties. It is, therefore, clear to us that the trip which was undertaken by the two directors and the production manager was in effect and substance for purposes of finding out as to whether they should adopt new designs or not. In that view of the matter, therefore, we are of the opinion that the Tribunal was not justified in disallowing the proportionate claim of the assessee-company for the expenses incurred in connection with the trip abroad by its two directors and the production manager in connection with acquainting themselves with the technical know-how for manufacturing electric hoists on the ground that it was in the nature of capital expenses. We, therefore, answer the question as under :
13. On the facts and in the circumstances of the case, the Tribunal was not right in holding that out of the sum of Rs. 22,232, the expenditure incurred in connection with technical know-how for manufacturing electric hoists was capital expenditure.
14. We answer the question referred to us accordingly in favour of the assessee and against the revenue.
15. The Commissioner of Income-tax will pay the costs of the applicant-assessee.