B.J. Divan, C.J.
1. The assessee in both these cases is the same and the assessment years are different, viz., in Income-tax Reference No. 125 of 1974, the assessment year is 1965-66, whereas in Income-tax Reference No. 181 of 1974, the assessment year under reference is 1966-67.
2. The common question which is involved in both these cases in also the same. But in each of these two reference one additional question besides the common question has also been referred to us for our opinion. Since the common question which arises in both these mattes is the question of major importance, we will dispose of both these matters by this common judgment.
3. In Income-tax Reference No. 125 of 1974, at the instance of the revenue, the following questions has been referred to us for our opinio :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the one-fifth of the expenditure incurred by the assessee for purchase of drawings, designs and partners from the foreign concern under the agreements for manufacture of certain machinery was allowance as revenue expenditure
4. In this reference, at the instance of the assessee, the following second question has been referred to us by the Appellate Tribun :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the expenditure of Rs. 2,125 incurred by way of holding that the same did not satisfy the test laid down for allowance of the claim under section 37 of the Income-tax Act, 1961 ?'
5. In Income-tax Reference No. 181 of 1974, at the instance of the revenue, question No. 1, which is on the same lines as question No. 1 in Income-tax Reference No. 125 of 1974, has been referred to u :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that one-fifth of the expenditure incurred by the assessee in respect of drawings, designs and patterns from the foreign concern under the agreements for manufacture of certain machinery was allowable as revenue expenditure ?'
6. In this reference, at the instance of the assessee, the following second question has been referred by the Appellate Tribunal to us for our opinio :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing expenditure of Rs. 10,965 paid to Hayeka Engineering A. G. Zurich for getting their expert opinion ?'
7. The facts leading to these two references are as follow :
In Income-tax Reference No. 125 of 1974, we are concerned with assessment year 1965-66. As pointed above, the first question in both these references is common, and the facts relevant for consideration of that first question in each of these two reference are thes :
The assessee is a public limited company, which carries on business of manufacture of diesel engines, compressors, pumps and blowers. The factory of this assessee is situated at Vatva. The relevant previous is the calendar year 1964 and the method of accounting is mercantile system. The assessee-company had entered into three agreements with their foreign collaborators, viz., Swiss Locomotive and Machine Works (hereinafter called 'the S.L.M.'). The first agreement was of August 14, 1957. It was for the manufacture of rotary air-compressors. The second agreement, dated March 7, 1961, was between the same parties in connection with the manufacture of rotary blowers and water-ring pumps. The third agreement dated September 27, 1961, between the same parties was in connection with manufacture of vertical diesel engines. These agreements were entered into between S.L.M. on the one hand and T. Maneklal (hereinafter referred to as 'Maneklal'). As a result of the discussion between the two contracting parties, a new company, S.L.M. Maneklal Industries Ltd., the assessee-company, was floated an by subsequent agreement, it was agreed between S.L.M. on the one hand and Maneklal on the other, that in the three agreements referred to above, wherever the words 'T. Maneklal' appeared, name of the new company, i.e., 'S.L.M. Maneklal Industries Ltd.,' should be substituted. This agreement was arrived at some time in the year 1962. As regards the first collaboration agreement of August 14, 1957, regarding the manufacture of rotary air-compressors, it was agreed between the contracting parties that the balance period of the agreement of August 14, 1957, should be transferred to the new company, i.e., the assessee-company before us. As a result of this agreement, all the three agreement stood transferred in the name of the assessee-company. Under the three agreement, the main clause in respect of each of the products covered by the agreement was the same except that there was some variation regarding the export of the product covered by the agreement relating to rotary blowers and water-ring pumps. Clause 13 of that particular agreement dated March 7, 1961, was slightly different regarding the export of these particulars articles. But barring this distinction, the rest of the provisions of the three agreements are on the same lines.
8. At the time when the assessment was under consideration before the Income-tax Officer for the assessment year 1965-66, the assessee contended that it was the usual practice of this assessee in their accounts system that the expenditure incurred by it for paying the price for the supply of workshop drawings, manufacturing instructions, etc., as stated in accordance with clause (18) of each of these three agreements, should be spread over a period of five in conformity with the assessment orders passed in the past and that is why the assessee claimed deduction of one-fifth of expenditure incurred for drawings and designs in accordance with clause (18) of each of the three agreements. The Income-tax Officer held that that this expenditure was incurred for acquisition of a capital asset in the shape of designs and drawings and, therefore, the claim of the assessee for deduction of the same on the ground that it was revenue expenditure, was not taxable. He rejected the alternative claim put forward by the assessee in regard to this item for depreciation on the impugned amount on the ground that there was no provision to allow depreciation on designs and drawings.
9. Thereafter, the assessee took the matter in appeal and the Appellate Assistant Commissioner agreed with the Income-tax Officer that the payment was only a capital expenditure. He, however, held that the assessee's claim for depreciation was justified and as such he directed that the entire cost of the three agreements should be taken as actual cost, and depreciation at the rate of 7 per cent. should be allowed.
10. The assessee took the matter in further appeal before the Income-tax Appellate Tribunal and the Tribunal, after examining the terms of the agreements in the light of the decisions in Commissioner of Income-tax v. Ciba of India Ltd. : 69ITR692(SC) , Commissioner of Income-tax v. Hindusthan General Electrical Corporation Ltd. : 81ITR243(Cal) , Mysore Kirloskar Ltd. v. Commissioner of Income-tax : 67ITR23(KAR) and Divides Vithaldas & Co. v. Commissioner of Income-tax : 84ITR277(SC) , held that it was a clear case of license and not of sale, so far as designs, drawings and patterns were concerned. By parting with those, the right of S.L.M. had not diminished in any manner, and the Tribunal held that on the facts and circumstances of the case, payments made for use of drawings designs and partners could not be said to have brought into existence an asset of an enduring nature. On the other hand, the payments had been made to get the benefit of licence for the purpose of running the business during the period for which the agreements were entered into with a view to earn profits and, therefore, these payments could not be held to be payments on capital account. The Tribunal, therefore, held that there was no need to disturb the basis adopted in the past and, consequently, one-fifth of the expenditure as claimed by the assessee should be allowed as a revenue expenditure in the year under reference. It is under these circumstances that the Tribunal declined to to into the alternative contention with regard to the allowance of the claim in full as a revenue deduction or claim for depreciation.
11. It was on these same facts that in each of these two references, the first questions has been referred to us at the instance of the revenue.
12. So far as question No. 2 in Income-tax Reference No. 125 of 1974 if concerned, it arises under the following circumstance :
An amount of Rs. 2,125 was spent by the assessee-company in the previous year relevant to the assessment year 1965-66 for presentation articles given to the sales manager as well as other officials of S.L.M. of the foreign company with which the assessee-company had entered into collaboration. So far as this item was concerned, the Income-tax Officer and the Appellate Assistant Commissioner held that this expenditure was not allowable as it could not be said t be incurred wholly and exclusively for the purpose of business. The Tribunal agreed with the view of the Income-tax Officer and the Appellate Assistant Commissioner and held that it could not agree with the contention put forward on behalf of the assessee that this expenditure was necessary with a view to improving the image of the company vis-a-vis the employees of the foreign collaborators. According to the Tribunal, the presentation of these different articles was merely a gesture of goodwill and the Tribunal held that this expenditure did not satisfy the test laid down for allowance of the claim under section 37 of the Income-tax Act, 1961. It was under the circumstances that question No. 2 Income-tax Reference No. 125 of 1974 came to be referred to us.
13. The second question in Income-tax Reference No. 181 of 1974 has been referred to as at the instance of the assessee under the following circumstance : In the previous year relevant to the assessment year 1966-67, the assessee company had paid an amount of Rs. 10,965 to Hayeka Engineering A. G. Zurich for getting their expert opinion in connection with erection of foundry which was to be stated to manufacture raw materials. The Income-tax Officer noted that neither the foundry had been started during the year nor was any business carried on nor was any manufacture made to show that these expenses were incurred in the course of such activities. The Income-tax Officer, therefore, held that it could not be construed or taken as expenditure laid out or wholly incurred in the course of or for the purpose of the existing business. Accordingly, the Income-tax Officer observed that the assessee itself had admitted that the foundry was started two years or so after the assessment year in which the expenditure had been incurred by the assessee-company. On this finding, the Income-tax Officer disallowed the assessee's claim for this amount of Rs. 10,965.
14. On appeal by the assessee-company, the Appellate Assistant Commissioner held that the assessee-company had not benefited itself in any way by incurring this expenditure and he further held that the expenditure had nothing to do with the actual business of the assessee. He, therefore, confirmed the order of the Income-tax Officer regarding disallowance of this item.
15. On further appeal, the Tribunal held that this infractions expenditure incurred by the assessee was not in the course of the running of the assessee's business. The assessee also did not acquire any assets for the business. It appeared to the Tribunal that the assessee made an attempt to explore if it could get into a new line, but after spending this much amount, came to the conclusion that the report was not of much use, and, under these circumstances, the Tribunal did not see any reason to interfere with the order of the Appellate Assistant Commissioner on this point.
16. Thereafter, at the instance of the assessee, the second question in Income-tax Reference No. 181 of 1974 came to be referred to us by the Tribunal.
17. Before coming to the discussion of the common question which arises for our discussion in each of these cases, we will dispose of question No. 2 referred to in each of these two references, because they are comparatively short and can be disposed of briefly.
18. As regards the presents to the sales manager and other officials of the S.L.M. the question is whether this expenditure of Rs. 2,125 is covered by the second question in income-tax references. It must be observed in this connection that, as will be later on seen in the course of this judgment, the S.L.M. and the assessee-company had to maintain good relations and by keeping the representatives of the foreign collaborators in good humour the work the assessee-company vis-a-vis the foreign collaborators would be smoothened considerably, it was clearly an act of good management and good managership to generate goodwill and such goodwill would help and was bound to help the assessee-company in keeping its relations with the employees of the foreign collaborators working smoothly and on proper lines. Since his expenditure of Rs. 2,125 was incurred by the assessee-company for the purpose of establishing good image for itself and for keeping the relation with foreign collaborators working smoothly it must be held that this amount was incurred by the assessee-company for the purpose of business. It must be observed that under section 37 of the Act of 1961, what is required to be considers is, whether a particular item of expenditure in respect of which deduction is claimed was laid out or wholly incurred for the purpose of business. It must not be an expenditure in the nature of capital expenditure or personal expenses of the assessee. These presentation articles can never be described as capital expenditure; they cannot be said to the personal expenditure of the assessee. The amount was spent by the assessee in order to enable it to run its business smoothly and to generate goodwill. Under these circumstances, it cannot be said that the amount was not incurred for the purpose of business. In view of the object with which this expenditure was incurred by the assessee-company and in view of the facts and circumstances set out hereinabove, it must be held that the sum of Rs. 2,125 was spent by the assessee-company for the purpose of its business and was expended wholly and exclusively for the purpose of its business. Question No. 2 in Income-tax Reference No. 125 of 1974 regarding this items of Rs. 2,125 must, therefore, be answered in favour of the assessee and against the revenue.
19. As regard question No. 2 in Income-tax Reference No. 181 of 1974, the facts leading to this question are to be found from the orders of the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal. As regards this item of expenditure, the Income-tax Officer, in para. 19 of his order, observe :
'An amount of Rs. 10,965 equivalent of Swiss Francs 10,000 was in respect of expenses incurred in connection with the report of new foundry for S. L. M. Maneklal Industries Ltd., as to its lay-out, size and lay-out of necessary buildings and crane capacity, and working method of every department of foundry, etc.,'
20. The Appellate Assistant Commissioner, in para. 17 of his order, has observed that the foundry was actually erected in 1969. The production of castings of iron was started in the month of March, 1969. But the foundry was not erected as per the opinion expressed by the Zurich company or as per the diagrams, statistics, etc., furnished by Hayeka Engineering A. G. Zurich. This particulars foreign company, Hayeka Engineering, had prepared a report containing their expert opinion running into 29 pages. That company had also furnished lost a of statistics giving various details in 32 pages with maps, diagrams, models of the foundations, engines, buildings, etc., etc., The assessee-company had not made any use of the opinion expressed an the maps and diagrams, etc., furnished by the foreign company. The assessee-company had not erected the foundry with the collaboration of the Zurich company company, and it was stated before the Appellate Assistant Commissioner that the plans furnished by the foreign company were not workable and thus, according to the Appellate Assistant Commissioner, the assessee-company had simply thrown away this amount of Rs. 10,965 in obtaining the expert opinion of which it did not make any use. In connection with this amount paid to Hayeka Engineering, the Tribunal has observed, as stated above, that this was infructuous expenditure incurred by the assessee-company and it was not incurred in the course of the running of the assessee's business. The assessee also did not acquire any asset for the business as a result of spending this amount of Rs. 10,965. According to the Tribunal, the assessee-company had made an attempt to explore if it could get into a new line but, after spending this much amount, came to the conclusion that the report was not of much use.
21. In view of what has been stated by the Income-tax Officer and the Appellate Assistant Commissioner, it is clear that the expenditure was incurred by the assessee-company in the previous year relevant to assessment year 1966-67, in connection with their object to establish a foundry which would manufacture iron castings, etc., required by the assessee-company in the manufacture of other products. It is obvious that the foundry, when established, would be an asset of a capital nature and any amount spent in connection with the foundry, which was a capital asset, would be an expenditure of a capital nature. The approach of the Tribunal and the Income-tax Officer as well as Appellate Assistant Commissioner from the point of view whether any fruitful results followed is, in our opinion, erroneous. What is required to be considered is, in our opinion, the object which such this particular expenditure was incurred. The amount of Rs. 10,965 spent for obtaining the expert opinion of Hayeka Engineering was by of preliminary expenditure before establishing the foundry which was an asset of a capital nature. Whether the opinion of the expert of Hayeka Engineering helped the assessee-company in establishing its foundry is totally immaterial. It appears from the record and particularly from the order of the Appellate Assistant Commissioner that a foundry for iron castings, etc., was established about two years later and it actually started functioning in the month of March, 1969. It is clear that after obtaining the opinion of the expert, the assessee-company came to the conclusion that the plans, specifications, etc., set out by the in his opinion and the documents which accompanied the opinion were not useful for the foundry which the assessee-company did actually establish. But, at the same time, it cannot be again said that the amount paid for the expert opinion was with the object of acquiring an asset of a capital nature.
22. The question of preliminary expenditure incurred in connection with a capital asset was considered by this High Court in Ambica Mills Ltd. v. Commissioner of Income-tax : 54ITR167(Guj) . In that case, the assessee-company which carried on textile manufacture authorised the tour by the director and superintendent of the company's mills for two purposes, viz.,(i) to make an on-the-spot study of the least development in the manufacture, designing and processing of cloth in the United Kingdom and other countries; and (ii) to make a report on their return on the work done by them as to the latest developments in the manufacturing, designing and processing to textiles seen by the representatives, and recommend as to whether the latest developments should be adopted and for that purpose, to purchase new machinery which would bring an enduring benefit to the assessee-company and which also would bring about a change in the methods of manufacturing, designing and proceeding. After their visit, the assessee-company did import that new improved and modern machinery for the purpose of being used in running its textile mills. The question arose as to whether the tour expenditure was deductible under section 10(2) (xv) of the Indian Income-tax Act, 1922, equivalent to section 37 of the Income-tax Act, 1961. In this connection, Shelat C.J., delivering the judgment of the Division Bench, observed at page 18 :
'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 a later stage would be one for the purpose of bringing into existence a capital asset and such expenditure would, therefore, be capital expenditure. It is true that the line of distinction between the two kinds of expenditures, particularly where it happens to be an expenditure of a preliminary type, is a thin one, but none the less, it is a perceptible one. No hard and fact rule can be laid down for universal application and each case must depend upon its own facts and circumstances. It would, therefore, be the duty of the courts to find out from a scrutiny of facts and circumstances the true and proper nature of such expenditure.'
23. In that case it was held that the expenditure for the tours was not revenue expenditure, but was capital expenditure. In the instant case also, this amount of Rs. 10,965 paid to Hayeka Engineering in the previous year relevant to assessment year 1966-67 was by way of preliminary expenditure incurred by the assessee-company for the purpose of bringing into existence a capital asset and the preliminary expenditure incurred with that object would, therefore, be a capital expenditure. In our opinion, the fact whether the expenditure was infructuous or not is beside the point. The fact that the assessee-company did not acquire any asset as a result of the except opinion of Hayeka Engineering Company in also beside the point. The question whether the report was of much use or not is not relevant for the purpose of considering whether this amount of Rs. 10,965 was deductible under section 37 of the Act of 1961. In our opinion, the only way to consider the deductibility of this expenditure of Rs. 10,965 is from the point of view of considering whether the expenditure was of a capital nature or not. Since it must be held that this preliminary expenditure of Rs. 10,965 was incurred for the purpose of bringing into existence a capital asset, the preliminary expenditure itself must be held to be an expenditure of a capital nature within the meaning of section 37 of] the Act of 1961 and hence, deduction cannot be allowed under section 37 of the Act of 1961. In view of this conclusion, question No. 2 regarding disallowance of the expenditure of Rs. 10,965 paid to Hayeka Engineering Co., must be answered in favour of the revenue and against the assessee. However, we must make it clear that the purpose of reasoning which has appealed to us is different from the process of reasoning which appealed to the Tribunal.
24. Coming now to question No. 1 in each of these two income-tax references, in order to answer the question referred to us, it is necessary to refer in detail to the different clauses of each of these three agreements. As point out above, the three agreements were as follow :
(1) rotary compressors,
(2) rotary blowers and water-ring pumps, and
(3) vertical diesel engines.
Each of these three agreements is designated as 'licence agreement' for the manufacture of a particular item covered by the agreement. Since each of these three agreements is on the same lines we will refer to the a remnant entered first in point of time, viz., agreement dated August 14, 1957, between S.L.M. (Swiss Locomotive and Machine Works, a Swiss Corporation) and T. Maneklal Manufacturing Company. The first agreement was for the manufacture of rotary air-compressors in the workshop of Maneklal at Kurla in Bombay and the sale of such compressors in the whole territory of the Union of India under a license agreement to the end of entering to (sic) with S.L.M. The preamble of the agreement shows that Maneklal had offered to organise and undertake the manufacture of rotary air-compressors in their own workshops and the sale of such compressors in the whole territory of the Union of India under a license agreement to the end of entering (sic) with S.L.M. and S.L.M. had accepted to grant such manufacturing licence to Maneklal. It is clear that all the clauses of this agreement have to be read in context of this most important aspect, viz., that the parties to the agreement were entering into an agreement for a manufacturing license to be granted by S.L.M. to Maneklal for the manufacture of air-compressors and for the sale of those air-compressors in the territory of the whole of India.
25. Under clause (1) of the agreement, S.L.M. granted to Maneklal an exclusive licence for the assembling and manufacturing in their own workshops at Kurla, Bombay, of all standard types of single and two stage water-cooled rotary air-compressors type 'K' which were suitable. These air-compressors could with some modifications also be used as vacuum pumps. It was agreed between the parties that during the continuance of the agreement. S.L.M. would not grant a manufacturing licence for such rotary compressors to any other party in India. It was also agreed upon by clause (1) that in case S.L.M. were to consider to grant manufacturing rights in India for special types of compressors, such as for instance air-cooled compressors, Maneklal were to be given first opportunity to negotiate with S.L.M. the terms of a possible extension of the manufacturing rights to such special types of compressors, but in the event of such negotiations failing or Maneklal not being interested, S.L.M. were to be free to grant such manufacturing rights to other parties in India.
26. By clause (2) of the agreement, S.L.M. agreed to prepare and put at the disposal of Maneklal one completed set of copiable workshop drawings in millimeter scale and clearance tables, manufacturing instructions, part lists, specification of material to be used, instructions for assembling, testing and operation, all in English or with regard to manufacturing drawings with English translation annexed and also to advise Maneklal with regard to machine tools and other workshop equipments required of an economic manufacture an reliable testing of the compressors covered by the agreement, it being understood that S.L. M. were to give all such information, instructions and advice according to their best knowledge and experience, but without thereby assuming any responsibility for possible errors or omissions.
27. Under clause (3), at the request of Maneklal, S.L.M. were to supply at lowest current prices one complete set of proto-type manufacturing devices, jigs, special tools, control gauges, and calipers required for the manufacture and assembly of the compressors. It must be borne in mind that under this clause S.L.M. agreed to supply these different items covered by clause (3) at lowest current prices and, thus, it seems that the articles mentioned in clause (3) were to be sold outright by S.L.M. to Maneklal in order to enable Maneklal to manufacture and assemble air-compressors which are the subject-matter of the licence under review.
28. Under clause (4), Maneklal agreed to make arrangements for the necessary manufacturing, assembling and testing facilities and provide adequate workshops and machine tool equipments, skilled and unskilled staff and also to make provision for keeping a reasonable stock of raw materials and component parts. The workshop equipments were to be adequate for an initial target of 100 compressor stages per year, but were later to be expanded for a production of 250 to 300 compressor stages annually if warranted by the market requirements.
29. Under clause (5), Maneklal agreed to engage at terms and conditions to be agreed upon separately one or two experts, S.L.M. work's engineers who were to advise and assist Maneklal in organising economic production, selection of proper raw material, checking accuracy of machining, correct assembling and testing of machines. The duties of the said S.L.M. engineers were, inter alia, also to include technical assistance in sales, such as, giving advice and service to customers, working out quotations, tenders and necessary technical comments.
30. Under clause (6) of the agreement, Maneklal agreed to delegate at their expense one or two Indian production engineers or experienced workshops foremen to the S.L.M. works and S.L.M. were to undertake to give those delegated free of charge full practical training in all work shop departments concerned with the manufacture, assembling and testing of rotary compressors.
31. Clauses (7),(8) and (9) of the agreement are material for the purpose of this judgment and we set them out in extens :
'(7) Maneklal shall manufacture strictly according to works' drawings and instructions and shall not provide any alterations or deviations from such drawings and instructions without the preliminary approval of S.L. M.'
'(8) Any improvements S.L.M. may introduce during the continuance of this agreements in the design of the compressors being the subject-matter of this agreements and/or parts and accessories thereto shall be communicated to Maneklal who will have the right to make use thereof in their own manufacture, likewise, S.L.M. shall have the right of free use of any improvements Maneklal may, according to their own experience, propose to be incorporated in the design of the compressors.'
'(9) The drawings and all other technical information supplied by S.L. M. shall be treated strictly confidential and shall be used only for the scope and during the continuance of the present license agreement. They shall not be handed-over, made accessible for inspection or otherwise during the period of this agreement or after its termination.'
32. Under clause (10) of the agreement, Maneklal got a right to sell single-stage compressors manufactured under the licence agreement for use as vacuum pumps, providing the necessary adjustment and alterations in lay-out as per advice to be obtained from S.L.M. from time to time.
33. Under clause (11), Maneklal were to develop the manufacture of compressors according to the programme proposed to the Government and sanctioned by the manufacturing licence issued by the Government of India.
34. Clause (12) is also material for the purpose of this judgment and we set it out verbati :
'(12) Maneklal shall not assign any manufacturing and other rights granted to them in this agreement to third parties. They are, however, authorised to have certain accessories or parts or casing manufactured by local sub-contractors under their supervision.'
35. Under clause (13), S.L.M. granted exclusive selling rights in India by for all compressors assembled and/or manufactured by Maneklal under the licence agreement. These compressors were to be sold and used within the territory of the Union of India only and not to be exported to any other country unless otherwise expressly agreed to by S. L. M. Maneklal were to organise an promote the sale in the whole of India efficiently and print suitable leaflets and other propaganda material bases on the data to be supplied by S.L.M.
36. Under clause (14) it was agreed that the air-compressors manufactured under licence by Maneklal were to be covered by Maneklal's own works guarantee for one year and S.L.M. were not be assume any responsibility vis-a-vis Maneklal or third parties in connection with compressors.
37. Maneklal were to maintain under clause (15) an efficient erection and after-sales service, and that clause deals with the obligations of Maneklal in connection with sales and services.
38. Under clause (16), it was agreed that compressors assembled and/or manufactured by Maneklal were to be marketed in India under the trade mark 'S.L.M. - MANEKLAL'. Maneklal were to apply for the registration and use of the trade make as soon as the licence agreement had become effective. The registration and use of the trade mark were to be discontinued on termination of the licence agreement.
39. Clause (17) provides for royalty payments and 'in consideration of the grant of manufacturing and selling rights by S.L.M.' Maneklal were to pay to S.L.M. a royalty in Swiss francs equivalent to five per cent. of the net selling price in rupees ex-works Maneklal, excluding sales tax and third party commissions, if any, as well as the invoiced value of such component parts as S.L.M. had to supply for the manufacture of rotary air-compressors, i.e., the royalty was to be paid only on the compressors parts manufactured in India and not on the entire compressor sets which might include prime movers, trolleys, etc. The royalty was to be converted into and payable in Swiss frames at the rate provided in this clause (17). This payment was to be subject to the Indian Income-tax Act.
40. Clause (18) provides that for the supply of copiable workshop drawings, manufacturing instructions, etc., as per clause (2) of the agreement, S.L.M. were to charge Maneklal the selling prices as set out in clause (18). An advance of Swiss francs 37,500 representing the cost of manufacturing documents for three single and two stage compressors, small and medium types, were to be paid to S.L.M. within 30 days of the agreement becoming effective, and the principal question that we have to consider is the payment made by the assessee-company to S.L.M. in Switzerland under clause (18) of the agreement. It is common ground between the parties that the royalty payment made by the assessee-company to S.L.M. under clause (17) of the agreement has been allowed as a deductible expenditure. Amounts exceeding the advance payments were to be paid on commencement of the work of preparing workshop drawings, manufacturing instructions, etc., by S.L.M. All payments due to S.L. M. under clause (18) were to be made in Swiss francs. Import duty, income-tax and other taxes and fees, if any, payable in India, were to be borne by Maneklal.
41. Under clause (19), Maneklal agreed that, during the continuance of the agreement, it would neither directly or indirectly undertake or promote the manufacture and sale of compressors of alien design competing with those covered by the agreements with S.L.M. and by amendments thereto, if any.
42. Clause (20) is not material for the purpose of this judgment. Clause (21) provides that the agreement was made for an initial period of ten years with option of renewal to either party for an additional period of five years, but the renewal was subject to prior approval of the Government of India. The party who wished to make use of the option had to advice the other party in writing not later than 12 months before the expire of the initial period of ten years.
43. Clause (22) is not material for the purpose of this judgment. Clause (23) provides that the agreement was subject to the approval by the Government and the Reserve Bank of India and was to be executed as per the regulations in force in as soon as the approval of these two authorities had been obtained. It was also provided that if the approval was not obtained within six months after the signing of the agreement, the agreement was to stand terminated automatically.
44. As pointed out earlier, we are concerned in this case with the payments made by the assessee-company for what are referred to as selling prices for copiable workshop designs in millimeter scale and clearance tables, manufacturing instructions, part lists, specifications of materials to be used, instructions for assembling, testing and operation, as referred to in clause (2). Clause (18) of the agreement in terms state that for the supply of copiable workshop drawings, manufacturing instructions, etc., as per clause (2) of the agreement, selling prices mentioned in clause (18) were to be paid by Maneklal and now, the assessee-company, to S.L.M. The question that the were have to ask ourselves is, what is the nature of this expenditure. It is obvious that these workshop drawings, manufacturing instructions, etc., referred to in clause (2) of the agreement, were to be obtained by the assessee-company form S. L.M. for the purpose of enabling it to exploit the licence agreement and to manufacture rotary air-compressors under the licensing agreements. Thus, supply of these copiable work-shop drawings, etc., was for the purpose of the main licence itself and in the course of working out the terms and conditions of the licence to manufacture the rotary air-compressors.
45. In Commissioner of Income-tax v. Elecon Engineering Co. Ltd. : 96ITR672(Guj) we had an occasion to consider the exact nature of drawings and patterns acquired from a foreign company and also regarding the nature of the know-how forming the basis of business. The question was, whether these drawings and patterns and know-how forming the basis of business of the assessee could be considered to be 'plant' within the meaning of the word 'plant' in a compendious phrase 'buildings, machinery, plant or furniture' occurring in section 32 of the Income-tax Act, 1961. Section 32 provides for depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purpose of business or profession and deductions for depreciation have to be allowed in accordance with the order provisions of section 32 subject to the provisions of section 34. We examined the entire legal position and held that know-how is a peculiar kind of asset. It is the accumulated fund of knowledge acquired by years of observations, research, experimentation and experience. The whole of it is not in an intangible form even while it is in the process of being acquired and very often it takes a physical form as it grows in the shape of formula, drawings, patters, blue prints, specifications and so on. The material form it takes not only facilitates preservation, collection and ready reference but also makes it perceptible and visible and easily capable of being transmitted to others. Books which one to inform one's mind and thereby uses them in the course of one's business or profession are expressly included within the meaning of the word 'plant'. Hence, there is no reason to exclude form the wide meaning of the firm objects of similar nature such as drawings, patterns, designs, etc., which, like books, are the embodiments of know-how and serve the purpose of teaching at long range. Having regard to the legislature intent to give a wide meaning to the word 'plant', material record of know-how (even assuming that know-how itself is intangible) is clearly included within the meaning of the word 'plant' in section 32. In Elecon Engineering Co.'s case : 96ITR672(Guj) the assessee acquired drawings and patterns for the manufacture of gear units and conveyor idlers from foreign collaborators. The agreement between the assessee and the foreign collaborators provided that the assessee would receive 'all existing and up-to-date patterns, drawings and information which the authorised manufacture requires'. The Tribunal found as a matter of fact that the drawings and patterns formed the business of manufacturing the machinery in question, and we held that the drawings and patterns by themselves did not perform any mechanical operations or processes and on the commencement of production of gears and idlers it might not be necessary to consult them and owing to technological advance they might in course of time become obsolete. These factors, however, could not militate against their being plant since they formed the basis of manufacturing the machinery and they were, so to say, the basic tools of the assessees' trade having a fairly enduring quality. The drawings and patterns were 'plant' with the meaning of section 32 and the assessee was entitled to depreciation in respect of those assets on the pro rata cost of their acquisition. In the course of what judgment, decision of the House of Lords in the cases of Jeffrey v. Rolls-Royce Ltd.,  56 ITR 580 and Musker v. English Electric Co. Ltd.,  42 TC 556 were considered and the nature of know-how was considered. It was pointed out that the nature of receipts from the know-how depends essentially upon the transaction out of which they arise and the context in which they are received. Where know-how is imparted under certain circumstances, it may be a revenue expenditure as was held in Rolls-Royce's case  56 ITR 580 and in Musker v. English Electric Co. Ltd.,  41 TC 556 . However, we have pointed out in Elecon Engineering Company's case : 96ITR672(Guj) that the question that is to be considered in a case where the assessee before the court is a recipient of the know-how is, whether in the case of the assessee who is a recipient of the know-how the know-how itself and the physical embodiments of these know-how in the shape of plans, designs, workshop drawings, etc., are a capital asset or not in the sense of being 'plant' and it was held by us that the know-how and physical embodiments of the know-how were clearly included within the meaning of the word 'plant' and, therefore, was a capital asset. It is clear in the light of this decisions in Elecon Engineering Co.'s case : 96ITR672(Guj) that in the instant case also it must be held that the work-shop drawings, manufacturing instructions, etc., for which the 'selling prices' were paid by the assessee-company were capital assets.
46. The question that arises is, whether every expenditure incurred in connection with a capital asset is an expenditure of a capital nature.
47. In Gotan Lime Syndicate v. Commissioner of Income-tax : 59ITR718(SC) the Supreme Court held 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, for 'in the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure; it is a current expenditure, and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years'. The relevant observations are to be found at page 727 of the report. The Supreme Court approved of the observations of Channell J. in Alianza Company v. Bell  2 KB 666 . After stating what has been set out hereinabove, the Supreme Court observes (page 727 :
'This illustration shows that it is not in every case that an expenditure in respect of an advantage of on enduring nature is capital expenditure. The reason underlying the illustrations is that the payments made to enter into a forward contract have relation to the raw material eventually to be obtained. Viscount Cave acknowledged that in certain cases an expenditure for he inserted the words 'in the absence of special circumstances leading to an opposite conclusion' (in the English decision which was approved).'
48. In Gotan's case : 59ITR718(SC) the assessee, which carried on the business of manufacturing lime from limestone, was granted, under a lease dated 4, 1949, from the Government of Jodhpur, the right to excavate limestone in certain areas. The lease expired on July 14, 1952, but it was extended by the Government, the Rajpramukh of Rajasthan sanctioned 15 square miles of lime deposits to the assessee on October 4, 1954, on terms and conditions prescribed under the Jodhpur Division Vidhyan Limestone Mining Leases Rules, 1954. For the period July, 1952, up to the date the new lease was to be given effect to, a fixed royalty of Rs. 96,000 per annum had to be paid on the on the basis of dead rent. Under those Mining Rules, a mining lease could be granted only to a holds of a certificate of approval from the mining department, and the lease was to be for a period of five years with an option for reveal for another period of five years. Dead rent was to be charged at Rs. 10 per acre while royalty was to be charged at a. 6 p. per maund of lump and 1 a. per maund of limestone. Rule 19 of the rules laid down that the lessee shall not encroach upon cultivable land or bapi holdings within the leased area without obtaining the permissions of the Director of Mines and payment of compensation to the holder of such land. The assessee could not carry away any other minerals which might be found in the area and he was further obliged to allow other lessees of those minerals to go no the land and win them. The assessee never executed the contemplated lease deed but continued to work the lime deposits. Payments were finalised by the mining engineer who fixed the royalty at Rs. 96,000 per year as the royalty at the rate fixed by the Rules was far less than that figure. For each of the assessment years 1954-55, 1955-56 and 1956-57, the assessee paid a sum of Rs. 96,000 to the Government and claimed it as a revenue deduction, and it was on these facts that the Supreme Court considered the question of expenditure being incurred by an assessee in connection with obtaining of an enduring advantage. It is to be borne in mind that the decision of Channell J. in Alianza Company v. Bell  2 KB 666 was relied upon in support of the proposition that in every case, if an ending advantage was obtained, the expenditure for securing it must not be necessarily treated as capital expenditure. The nature of expenditure depends essentially upon the totality of the circumstances attending upon the transaction and the context in which it is made. Where payment is made for the ownership of a capital asset, which is the tool of an assessee's trade, it may not be difficult to come to the conclusion that the expenditure is in the nature of capital expenditure. Where, however, the benefit of a capital asset is secured as one element of a comprehensive arrangement by virtue of which a trader seeks to obtain advantage with the end in view to expend his business and earn greater profits, the whole transaction will have to be critically analysed in order to find out whether the expenditure incurred as a part of that transaction for acquiring the benefit of the use of the capital asset is in the nature of capital expenditure.
49. It must be borne in mind that as becomes clear from the report in Elecon Engineering Co.'s case : 96ITR672(Guj) there was no controversy in that particular case before the Tribunal as to whether the expenditure in question was a revenue expenditure. As pointed out at page 677 of the report, during the course of the hearing of the appeals, the assessee did not 'seriously press' the contention that the expenditure in question was revenue expenditure. The assessee, however, contended that if the expenditure was of a capital nature as help by the income-tax authorities, what was acquired as a result of such expenditure would be a capital asset in respect of which the assessee was entitled depreciation allowance under section 32 of the Act. It is clear the depreciation allowance can only be claimed by an assessee in respect of property which he owns and in Elecon Engineering Co.'s case : 96ITR672(Guj) the question about the ownership of designs, etc., was never in dispute. Both the sides in Elecon Engineering Co.'s case : 96ITR672(Guj) proceeded upon the footing that by incurring that particular expenditure, the assessee in that case had acquired certain know-how and the question was depreciation allowance could be allowed in respect of that particular know-how which was taken to be a capital asset. The question, therefore, which this court had to decide in Elecon Engineering Co.'s case : 96ITR672(Guj) was whether the plant, designs, machinery, etc., became a capital asset or was a 'plant' within the meaning of section 32 of the Income-tax Act. The question, however, which is in issue before us in this case and which was never in issue in Elecon Engineering Co.'s case : 96ITR672(Guj) is whether the assessee in the instant case acquired ownership of the workshop drawings, manufacturing instructions, etc., as contemplated by law and, therefore, whether payment made for acquisition of workshop drawings, designs, etc., was capital expenditure incurred by assessee in this case. It is in the light of this distinction between the Elecon Engineering Co.'s case : 96ITR672(Guj) and this case, and proceeding at the same time on the basis that the technical date supplied to the assessee in the instant case by its foreign collaborators must be treated as capital asset in view of the decision in Elecon Engineering Co.'s case : 96ITR672(Guj) that we have to decide this common question which has been referred to us for our opinion in both the cases.
50. The decision the Supreme Court in Gotan Lime Syndicate's case : 59ITR718(SC) clearly indicated, it may be reiterated here, that every expenditure in connection with a capital asset is not necessarily capital expenditure. The question, therefore, that we ask ourselves is, whether by spending this money the assessee purchased form S.L.M. and S.L.M. sold the assessee the workshop drawings, manufacturing instructions, etc., mentioned in clause (2) in each of the three agreements. As to what is a 'sale' has been clearly explained in Government of Andhra Pradesh v. Guntur Tobaccos Ltd. : 2SCR167 of the report, Shah. J. (as he then was), delivering the majority judgment, observed quoting form the earlier decision the majority judgment, observed quoting from the earlier decision of the Supreme Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., 9 STC 353 (SC).
'Thus, according to the law both the England and of India, in order to constitute a sale it if necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction, property must actually pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely title to the goods passes but not as a result of any contract between the parties, express or implied, there is no sale. So also if the consideration for the transfer was not money but other valuable consideration, it may then be exchange or barter but not a sale. And if under the contract of sale, title to the goods has not passed, then there is an agreement to sell and not a completed sale.'
51. It is true, as Mr. Kaji for the revenue emphasised before us, that in the instant case, in the clause (18) of each of the three agreements reference is to the selling prices and the amount mentioned in clause (18) is to be paid by the assessee-company to S.L.M. for the supply of workshop drawings, manufacturing instructions, etc., mentioned in clause (2) of the agreement. It can, therefore, be said that there was an agreement in each of the here licensing agreements. Secondly, it can be said that consideration in terms of money was to be paid, but the main question that remains is whether the property in these workshop drawings, manufacturing instructions, etc., passed or was in contemplation of the parties to pass from S.L.M. to the assessee-company. Normally, when a person purchases any property and there is a completed sale, he gets full title over the property and he can deal with the purchased articles in such manner as he likes. It is true that at the time of sale, certain conditions may be imposed, which, under certain circumstances, can even be enforced against the purchaser. But the question that we ask ourselves is whether in the context in which these workshop drawings, manufacturing instructions, etc., were to be supplied to the assessee-company it was contemplated that the property in goods should pass from the supplier, i.e., S.L.M. to the assessee-company. First point to be noted in this connection is that this was not an independent sale but was a part of an overall arrangement by which the license to manufacture rotary air-compressors or rotary blowers and water-ring pumps or vertical diesel engines was being granted by S.L.M. to the assessee-company. There was no independent sale of the workshop drawings, manufacturing instructions, etc., Secondly, the workshop drawings, manufacturing instructions, etc., by themselves were of no use of the assessee-company unless they were meant for the purpose of manufacturing different types of machinery, viz., rotary air-compressors, rotary blowers, water-ring pumps and vertical diesel engines. Then we have also consider the restrictions which are set out in clauses (7),(8),(9) and (12) of the agreement which hedge in the rights of the assessee-company with regard to these workshop drawings, manufacturing instructions, etc. The first thing is that under clause (7) the assessee-company has to manufacture a piece of machinery covered by the license concerned strictly according to workshop drawings, manufacturing instructions, etc., and there is no alteration or deviation permitted from such drawing and instructions without the preliminary approval of S.L.M. This is a serve restriction on the right of the assessee-company to deal with the workshop drawings, manufacturing instructions, etc., given to the assessee-company by S.L. M. Even alterations and deviations in these workshop drawings, manufacturing instructions, etc., can be made only with the preliminary approval of S.L.M. Secondly, under the second part of clause (B) of the agreement, S.L.M. has a right of free use of any improvements Maneklal may, according to their own expenditure, propose to incorporate in the design of the compressors. Any improvements which S. L.M. may introduce during the continuance of the agreement in the design of the compressors, etc., are to be communicated to Maneklal who will have the right to make use thereof in their own manufacture. But reading clauses (7) and (8) together, even if the assessee-company, in the light of its own expenditure, proposes to incorporate any alterations or improvements, they have first to be approved by S.L.M. and S.L.M. itself will have a right to the free use of such improvements in the designs, etc., Thus, even the improvements in the designs, etc., which improvements are suggested by experience, have to get the prior approval and all other technical information supplied by S.L.M. have to be treated as strictly confidential and have to be used only for the scope and during the continuance of the license. They are not to be handed over, made accessible for inspection or otherwise communicated to other parties, either during the period of continuance of the licence or after its termination. Therefore, so far as the assessee-company was concerned, apart from treating the drawings and all other technical information as strictly confidential, it was incumbent upon the assessee-company to use the drawings and other technical information supplied by S.L.M. only for the scope of the licensing agreement concerned and it was to be used only during the continuance of the licensing agreement and after the termination of the licensing agreement it would not be open to the assessee-company to use the drawing and all other technical information supplied by S.L.M. for its own purpose and it cannot hand over, make accessible for inspection or otherwise communicate, to other parties the drawings or technical information either during the continuance of the agreement or after its termination. Under clause (12) the assessee-company cannot assign any manufacturing and other rights granted to the assessee-company in the agreement to third parties. But the assessee-company was authorised to have certain accessories or parts or castings manufactured by local sub-contractors under their supervision. Therefore, if any rights were given to the assessee-company in these workshop drawings, manufacturing instructions, etc., they were not to be assigned to any one else and, therefore, the non-assignability is attached to these particular species of assets. viz., workshop drawings, manufacturing instructions, etc., as a part of an over-all licensing agreement and only import the know-how for manufacturing these rotary air-compressors, rotary blowers, water-ring pumps and vertical diesel engineers, if S.L.M. agreed to supply workshop drawings, manufacturing instructions, etc. But the agreement makes it clear that the assessee-company having received the supply of these workshop drawings, manufacturing instructions, etc., would only utilise them for the purpose of the license and not for any other purpose. It could not assign its rights in connection with these workshop drawings, manufacturing instructions, etc., or the know-how, nor could the assessee-company at any time deviate from these workshop drawings, manufacturing instructions, etc., nor could it make any alterations and if any deviations or alterations were contemplated, prior approval of S.L.M. is necessary. Even if the assessee-company proposed to incorporate any improvements in the design, the benefit of those improvements had to be made available to S.L.M. and as clause (9) makes it very specific, these drawings and other technical information supplied by S.L.M. have to be used only for the scope of and during the continuance of the agreement. In view of these restrictions placed on the assessee-company about the user and the restrictions put on the rights of the assessee-company regarding these workshop drawings and manufacturing instructions, it is not possible for us to say that the property in these workshop drawings, manufacturing instructions, etc., for which the consideration is set out in clause (18) passed to the assessee-company. Since the property in the goods in question, viz., workshop drawings, manufacturing instructions and all technical information supplied by S.L.M. did not pass from S.L.M. to the assessee-company there can be no sale of these goods. The word 'goods' in this context covers the workshops drawings, manufacturing instructions, technical information, know-how, etc., and the there being no sale, it cannot be said that the assessee-company purchased these workshop drawings, manufacturing instructions, etc. The amount referred to in clause (18) was, therefore, not for the purpose of acquisition of ownership of any 'plant' as explained in Elecon Engineering Co.'s case : 96ITR672(Guj) . All that the assessee-company was doing was paying consideration, though separately designated in clause(18) and though separately set out from royalty, was in effect 'payment', for the use of workshop drawings, manufacturing instructions, technical information and know-how. All these were being supplied to the assessee-company for a limited period, i.e., for a period of ten years covered by the agreement initially and liable to be extended for a further period of five years and that too far a limited purpose, i.e., for manufacturing the particular articles covered by the agreement, viz., rotary air-compressors, rotary blowers, water-ring pumps and vertical diesel engines. It cannot be used of any other purpose. Even after the termination of the agreement, it was not open to the assessee-company to utilise these workshop drawings, manufacturing instructions, etc., for any other purpose whatsoever.
52. It is true, as Mr. Kaji has emphasised before us, that there is no clause in the licensing agreement providing that on the expiry of the period covered by the licensing agreement under consideration, these workshop drawings, manufacturing instructions, etc., were to be returned to the supplier S.L.M. However, as has been pointed out in Elecon Engineering Co.'s case : 96ITR672(Guj) , the aspect of obsolesces must be lost sight of while considering these technical know-how and information. As pointed out at page 710 of Elecon Engineering Co.'s case : 96ITR672(Guj) : 'It cannot be disputed that know-how, in whatever for it may be, is capable of diminishing in value over years by obsolesces.'
53. It is, therefore, not unlikely that the parties did not contemplate return of the workshop drawings, manufacturing instructions, etc. The papers would be obsolete and would be affected by obsolescence. Moreover, under clause (9) of teach of the three agreements, the user by the assessee-company is to be only for the scope and during the continence of the licensing agreement and, therefore, on the expiry of the period of the licensing agreement in question, it was not open to the assessee-company to make use of these workshop drawings, manufacturing instructions, etc., for any other purpose whatsoever; whether they were returned to S.L.M. or not would make to difference whatsoever in view of the convenient entered into by the assessee-company with S.L.M. under clause (9) of the agreement. They would be mere scraps of paper so far as the assessee-company was concerned, and whether those scraps of paper were returned or not would make no deference whatsoever to the legal rights between the assessee-company and S.L.M.
54. It may be pointed out that so far as aspect of workshop drawings, manufacturing instructions, etc., is concerned, this case falls directly within the four corners of the principles laid down by the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd., : 69ITR692(SC) . In Ciba's case : 69ITR692(SC) the assessee, originally names Ciba Pharma Ltd., was an Indian subsidiary of Ciba Ltd., of Basle, a Swiss company engaged in the development, manufacture and sale of medical and pharmaceutical preparations. The pharmaceutical section of the Swiss company in India was taken over by the assessee from January 1, 1948. Under as agreement dated December 17, 1949, the Swiss company undertook to deliver to the assessee all process, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of products discovered and developed in the Swiss company's laboratories and to forward to the assessee as far as possible all scientific and bibliographic information, pamphlets or drags, which might be useful to introduce licensed preparations and to promote their sale in India. It granted to the assessee 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 and also a license to use certain specified trade marks in the territory subject to any existing license which the third parties held at he date of agreement, or which the Swiss company might grant to third parties thereafter. In consideration of the right to receive scientific and technical assistance the assessee agreed to make contributions of 5%, 3 % and 2% respectively, of the net sale price of the products sold by the assessee toward : (i) technical consultancy and technical service rendered and research work done; (ii) cost of raw material used for experimental work; and (iii) royalties on trade marks used by the assessee. The assessee further agreed; (a) not to divulge to third parties without the consent of the Swiss company any Information received under the agreement; (b) without the written onsent of the Swiss company, not to assign the benefit of the agreement or grant sub-licenses of the patents and trade marks; and (c) upon termination of the agreement for any cause to cease to use the patents and trade marks and to return to the Swiss company all copies of information, scientific date or material sent to it and to refrain from communicating such information, scientific data or material received by it to any person. The agreement was to be in force for a period of 5 years from January 1, 1948, and was liable to cancellation by either party if the other party failed to perform or observe the provisions of the agreement, by giving it 3 months' notice. By a subsequent agreement the contribution payable was reduced from 10% to 6% of the net selling price of the pharmaceuticals. The question before the Supreme Court was, whether the contribution other than that part paid as royalties (royalties having even allowed as a deduction) was admissible as an allowance either under clause (xii) or under clause (xv) of section 10(2) of the Indian Income-tax Act, 1922. The Supreme Court held that the contribution was not allowable under section 10(2) (xii) as expenditure laid out or expended on scientific research. Payment made to recoup another person for expenditure on scientific research incurred by that other person, even it if might ultimately benefit the assessee, unless it was carried on for or on behalf of the assessee, not expenditure laid out or expended on scientific research related to the business of the assessee under section 10(2) (xii). It was further held that the contribution was allowable as business expenditure under section 10(2) (xv). 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 that company. The assessee acquired under the agreements merely the right to draw, for the purpose of carrying on its business as a manufacture 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 with any asset of its business, nor did the assessee acquired any asset or advantage of an enduring nature for the benefit of its business. Shah J. (as he then was), delivering the judgment of the Supreme Court, has pointed our at page 70 :
'In the case in hand in cannot be said that the Swiss company had wholly parted with its Indian business. There was also no attempt to part with the technical knowledge absolutely in favour of the assessee.
The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss company to the assesse : (a) the license 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 the business; (c) the license 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 form divulging confidential 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.'
55. It is true that all the feature of the agreement which the Supreme Court found in Ciba's case : 69ITR692(SC) are not present in the licensing agreements before us. However, it is to be noted that the licensing period was for a period of ten years in the instant case and that is a limited period, and looking to the type of project which is in contemplation, it cannot be said to be a period of sufficient durability in the context of which benefit of and enduring nature is commonly used in the discussion of taxation matters. Secondly, the object of the agreements in the instant case before us was to obtain assistance of the technical experience for running the business. Thirdly, the assessee-company was expressly prohibited form divulging confidential information to third parties and, lastly, there was no transfer of the fruits of research one for all. S.L.M. was to impart the benefit of any further improvements in the technique, in the process of designs, etc., of these different items covered by the three agreements to the assessee-company and to make the benefit of such improvements and research available to the assessee.
56. It may also be further pointed our that, in the instant case, S.L.M. agreed to grant exclusive right to manufacture all these pieces of machinery and sale thereof to the assessee-company. There is no material before us to show whether prior to the entering into these licensing agreements, S.L.M. had any extensive or limited business in these commodities in India. But it is definite that by each of these three licensing agreements, S.L.M. as shutting itself out of and lending to the assessee-company the markets in the entire territory of the Union of India. In the absence of any material, it is not possible for us to say that exactly the S.L.M. were ceding to the assessee-company and, therefore, this aspect of the case makes no difference so far as the facts of Ciba's case : 69ITR692(SC) and the facts of the present case are concerned. The fact that the stipulated payment was recovered in Ciba's case : 69ITR692(SC) dependent upon the sale and under the terms of clause (18) of the agreements before us, it was paid in one lump sum, makes no difference whatsoever to the essential nature of the transaction if the parties, so far as the facts of the present case are concerned. As in Ciba's case : 69ITR692(SC) , in the instant case also, royalty payable under each of the three agreements under clause (17) has in fact been allowed as a deduction. Thus, the payment for the overall transaction for granting licence has in terms been treated as a revenue expenditure. It is only the question of expenditure incurred for an associated or integral purpose connected with that licensing agreement, viz., supply of workshop designs, manufacturing instruction, etc., which were absolutely necessary for the purpose of giving effect to the licensing agreement which is in dispute before us and the very nature of things when we are considering the overall transaction entered into for the purpose of giving manufacturing licence, one cannot separate one type of payment covered by the licensing agreement form another.
57. In view of these conclusions, it is not necessary for us to refer to different decisions which were cited before us at the Bar, but we may only indicate some of those cases which were cited in the course of discussion.
58. In Mysore Kirloskar Ltd. v. Commissioner of Income-tax : 67ITR23(KAR) , the expenditure for the acquisition of know-how was disallowed as a capital expenditure. In Hylam Ltd. v. Commissioner of Income-tax : 87ITR310(AP) , the Andhra Pradesh High Court held, on the facts of that particular case before it, that the payments made by the assessee towards royalty were of a capital nature and inadmissible as deduction in the computation of the assessee's business income for the relevant year; that the acquisition of knowledge in respect of the new product, although allied in nature to the products that were already being manufacture by the assessee would amount to the acquisition of an advantage or an asset for the extension of the assessee's business. In the instant case, it must be emphasised, on the facts and circumstances of the case and in the light of the clauses of the agreements, that there was no acquisition by way of ownership of any capital asset. The S.L.M. was placing its technical information, knowledge, etc., at the disposal of the assessee-company for a consideration so that the licensing agreement for the manufacture of these different products could be undertaken under the terms of the licence by the assessee-company.
59. In British India Corporation Ltd. v. Commissioner of Income-tax : 89ITR138(All) the question before the Allahabad High Court was whether the amount of Rs. 50,000 spent by the assessee-company for developing distributorship of the assessee-company could be considered as a capital expenditure or revenue expenditure and it was held that it was not a capital expenditure and it could be allowed as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.
60. In Commissioner of Income-tax v. Hindusthan General Electrical Corporation Ltd. : 81ITR243(Cal) , the question before the Calcutta High Court was regarding expenditure incurred by the assessee-company for pay in to Simplex the cost (including freight, transport and insurance costs) of preparing and providing prints, designs, drawings, specifications, instructions and other information and of supplying patterns and tools upon invoices in respect thereof being submitted by Simplex to the assessee-company and the assessee-company had also to pay to Simplex a feet at the rate of 500 per annum towards salary of the members of the staff of Simplex appointed for the purpose. In that case, the Income-tax Officer allowed a deduction of Rs. 5,360 incurred by the assessee-company for the costs of preparing and providing prints, designs, drawings, specifications, instructions and other information, but the amount of Rs. 13,938 being the amount of royalty, was disallowed on the ground that it represented expenditure of a capital nature, and the Calcutta High Court held that 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. The Calcutta High Court pointed out that there were certain striking similarities between certain clauses in the agreement in the case before it and in the case in Commissioner of Income-tax v. Ciba of India Ltd. : 69ITR692(SC) . The Calcutta High Court also relied upon the decision in Gotan Lime Syndicate's case : 59ITR718(SC) . It must be pointed out that, in that particular case, the Calcutta High Court proceeded upon the footing the payments were intimately linked up with the manufacturing activities of the assessee and not with the capital values of the assets that the assessee would acquire. It may be pointed out that the view of the Calcutta High Court about the essential nature of drawings, designs, prints, specifications, instructions, etc., is different from the view that this High Court has taken in Elecon Engineering Co.'s case : 96ITR672(Guj) , and to the extent to which this High Court has, in Elecon Engineering Co.'s case : 96ITR672(Guj) , taken a different view, we respectfully differ from the view taken by the Calcutta High Court.
61. In the light of the above discussion, having regard to the totality of the circumstances attending upon the transactions in the instant case and in the light of the various aspects discussed above, and further in view of the fact that the payment in question was not made in this case with a view to acquire ownership of the capital asset in the form of workshop drawings, manufacturing instruction, etc., but was incurred as one element of a comprehensive arrangement by virtue of which the assessee merely became entitled to us this capital asset for a limited period with several restrictions super-imposed, the only conclusion that we can draw is that the expenditure was revenue in nature and that the amount was laid out to obtain an advantage not sufficiently enduring in nature, but with a view to earn more profit. It was, therefore, laid out wholly and exclusively for the purpose of business as contemplated by section 37 of the Income-tax Act, 1961.
62. In the right of the above discussion, we answer the questions referred to us as follow :
Question No. 1 Income-tax Reference No. 125 of 1974 in the affirmative, i.e., favour the assessee and against the revenue. Question No. 2 in the negative, i.e., in favour of the assessee and against the revenue. In Income-tax Reference No. 181 of 1974, we answer question No. 1 in the affirmative, i.e., in favour the assessee and against the revenue, question No. 2 in the negative, i.e., in favour of the revenue and against the assessee.
63. The Commissioner will pay the costs of the assessee in Income-tax Reference No. 125 of 1074. In Income-tax Reference No. 181 of 1974, since each party has succeeded partly and lost partly, we direct that there will be no order as to costs.