1. In this reference two assessment years are involved and this joint reference had been made under section 66(1) of the Income-tax Act, 1922, and section 256(1) of the Income-tax Act, 1961. The assessment years are 1961-62 and 1962-63, the corresponding previous years being the calendar years 1960 and 1961. The assessee is a company manufacturing glassware; and it deputed three of its technicians to the United States of America to enable them to obtain practical training in the manufacture of heat-resisting glassware. The training was imported by Thatcher Glass Manufacturing Co. incorporated in the U.S.A. In connection with this practical training, the assessee-company paid a sum of Rs, 71,625 (15,000 dollars) by way of fee to Thatcher Glass Manufacturing Co. and a further sum of Rs, 56,302 was spent by the assessee-company for the assessment year 1961-62 for travelling, lodging and other expense of the employees. A further sum of Rs. 3,489 was spent in the same connection by the assessee-company so far as the assessment year 1962-63 was concerned; and the company claimed the amounts of Rs. 71,625 and Rs. 56,302 as items of revenue expenditure for the assessment year 1961-62, and the sum of Rs, 3,489 as revenue expenditure for the assessment year 1962-63. The Income-tax Officer disallowed the sum of Rs, 71,625 paid by the assess-company as training fee to Thatcher Glass Mfg. Co. and out of the sum of Rs, 56,302 incurred by the assessee-company for travelling expenses, lodging charges, etc., for the employees, a sum of Rs, 50,000 was disallowed by the Income-tax Officer while assessing the income of the assessee-company for 1961-62. He disallowed the entire sum of Rs, 3,489 in connection with the assessment year 1962-63. Thereafter, the assessee-company went in appeal before the Appellate Assistant Commissioner and that officer dismissed both the appeals confirming the view of the Income-tax Officer that the sums which had been disallowed were items of capital expenditure. Thereafter, the assessee-company took the matter in further appeal to the Tribunal and the Tribunal directed the assessee-company to file an affidavit regarding the technical aspect of the training that was imported to three employees of the company by the Thatcher Glass Mfg. Co. In pursuance of that direction, the affidavit of Chandubhai Gordhanbhai Amin, a Master of Science in Glass Technology of the University of Toledo, U.S.A., and working as a glass technologist with the assessee-company since 1951, and also working as a Director of Manufacturing of the assessee-company was filed on September 14, 1966. The Tribunal did not find any reason to disbelieve the facts stated in that affidavit and, accepting the facts as stated in that affidavit to be correct, the Tribunal came to the conclusion that the assessee-company, which had been established since long, had been manufacturing various types of glassware including heat-resisting glassware. The scientific process of manufacturing heat-resisting glassware is not a secret process but, for practical application of the process, it would be necessary to have first-hand knowledge of the working of the process in a modern factory manufacturing superior variety of heat-resisting glassware. It was for this purpose, according to the affidavit and also according to the finding of the Tribunal, that the assessee-company had sent its three technicians to the U.S.A. to obtain technical knowledge from M/s. Thatcher Glass Mfg. Co., which had a great name in this line in the international market. The Tribunal held that, though the matter was not free from difficulty, the expenditure, in spite of the comparatively large amount involved in the assessment year 1961-62, was of revenue nature and was only an outlay for running the existing business in a more efficient manner which could not be termed a capital outgoing. Under these circumstances, the Tribunal accepted the assessee-company's claim for deduction of the sums of Rs. 71,625 and Rs. 50,000 so far as the assessment year 1961-62 was concerned and of the sum of Rs. 3,489 for the assessment year 1962-63. Thereafter, at the instance of the Commissioner of Income-tax, the following two questions have been referred to us by the Tribunal :
'(1) For the assessment year 1961-62.
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs. 71,625 and Rs. 50,000 were revenue expenditure
(2) For the assessment year 1962-63.
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3,489 was revenue expenditure ?'
2. The law applicable to the assessment for the assessment year 1961-62 is the Income-tax Act, 1922, and the relevant section of that Act is section 10(2)(xv), which provided as follows :
'10. (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be compute after making the following allowances, namely : ..... (xv) any expenditure (not being an allowance of the nature described in any of clauses (i) to (xiv) inclusive, bad not being in the nature of capital expenditure or personal expense of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation.'
3. The proviso to clause (xv) is not relevant for the purposes of this judgment. Under the Income-tax Act of 1961, which came into force from April 1, 1962, i.e., for the assessment year 1962-63, the relevant section is section 37. Sub-section (1) of section 37 provides as follows :
'(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or person expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'profit and gains of business or profession.'
4. Thus, in both the section, viz, section 10(2)(xv) of the 1922 Act and section 37(1) of the 1961 Act, the provisions are identical and the question that we have to consider in deciding this reference is whether the sums claimed by the assessee-company for the two assessment year 1961-62 and 1962-63 were in the nature of capital expenditure or were items of revenue expenditure. It is common ground before us that other requirements of section 10(2)(xv) of the 1922 Act the Section 37(1) of the 1961 Act are satisfied in the instant case and the only question that we have to decide is the question of capital versus revenue expenditure.
5. The line of demarcation between capital expenditure and revenue expenditure is very thin and learned judges in England and India and also in Australia have from time to time pointed out the difficulties in deciding as to whether a particular item of expenditure is capital expenditure or revenue expenditure and on which side of the line any particular item of expenditure would fall. All the case which arose till then were reviewed by the Supreme Court in 1954 in Assam Bengal Cement Co. Ltd v. Commissioner of Income-tax.
6. The last case which we need refer to is the decision of the Supreme Court in Commissioner of Income-tax v. Ciba of India Ltd. In that case before the Supreme Court, the assessee-company was an Indian subsidiary of Ciba Ltd. of Basle, a Swiss Co., engaged in the development, manufacture and sale of medical and pharmaceutical preparations. The pharmaceutical section of Swiss company was tank over by the assessee under an agreement, dated December 17, 1947, from January 1, 1948. Under the agreement the Swiss company under took to deliver to the assessee all processes, formulae, scientific data, working rules and prescription pertaining to the manufacture or processing of products discovered and developed it the Siwss company's laboratories and to forward to the assessee as far as possible all scientific and bibliographic information, pamphlets or drafts, 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 patents listed in the agreement to make use, exercise and vend the inventions specified therein in India and also a licence to certain specified trade marks in the territory subject to any existing license which third parties held at the date of the 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 towards, (i) technical consultancy and technical service rendered and research work done, (ii) cost of raw materials used for experimental work; and (iii) roulettes 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 confidential information received under the agreement; (b) without the written consent of the Swiss company, not to assign the benefit of the agreement or grant sub-licences of the patents and trade marks; and (c) upon termination of the agreement for any cause to use the patents and trade marks and to return to the Swiss company all copies of information, scientific data or material sent to it and to reaffirm from communicating any 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 to observe the provisions of the agreement by giving it 3 months' notice. By the a subsequent agreement the contribution payable was reduced from 10% to 6% of the net selling price of the pharmaceuticals. The question was whether the contribution other than that paid as royalties (royalties having been allowed as deduction) was admissible as an allowance either under clause (xii) or under clause (xv) of section 10(2) of the Act of 1922. It was 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 if it might ultimately benefit the assessee, was 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, however, 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 filed 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 agreement merely the right to draw, for the purpose of carrying on its business as manufacturer 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 acquire any asset or advantage of an enduring nature for the benefit of its business. In that case Shah J., delivering the judgment of the Supreme Court, pointed out at page 701 :
'In the case of Rolls Royce Ltd. payment received for licensing a foreign Government to manufacture aero-engines with the accumulated technical knowledge of the taxpayer and for supplying the necessary information and drawings, and for advising the foreign Government as to improvements and modifications in manufacture and design, instructing the licensee's personnel in their works and for releasing members of their own staff to assist in the manufacture of engines by the licensee was hald to be received on revenue account of the taxpayer's trade. In English Electric Company's case the taxpayer contracted with Admiralty to design and develop a turbine and to license its manufacture by a limited number of companies in the United Kingdom, Australia and Canada and also contracted with the Government of Australia and an American aircraft manufacturing corporation to license the manufacture of a bomber which the taxpayer had designed and developed and received fixed lump sum payments as a consideration for imparting 'manufacturing technique' to the licensee. The receipts were held to be income.'
7. In that case Shah J. has further pointed out at page 701 :
'The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss company to the assessee : (a) the licence 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 licence 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 from divulging confidential information to third parties without the consent of the Swiss company; (e) there was no transfer of the fruits of research once and for all; the Swiss company which was continuously carrying on research had agreed to make it available to the assessee; and (f) the stipulates payment was recurrent dependent upon the sales, and only for the period of the agreement.'
8. It is clear from his decision of the Supreme Court that the payment made with a view to obtain the benefit of technical assistance for running there assessee's business and not by way of revenue expenditure.
9. In the instant case, it has been found as fact by the Tribunal that the assessee-company had deputed three of its technicians to U.S.A. to enable them to obtain practical training in the manufacture of heat-resisting glass. It has further been found that it had no reason not to accept the facts stated in the affidavit of Chandubhai Gordhanbhai Amin on behalf of the assessee. The Tribunal had found that the assessee-company had been established since long and had been manufacturing various types of glass-ware including heat-resisting glass by the scientific process of manufacture of heat-resisting glassware. For practical application of the process it would be necessary to have first hand knowledge of the working of the process in a modern factory manufacturing superior variety of heat-resisting glassware. It was for this purpose that the company sent its technicians abroad to obtain practical knowledge from M/s. Thatcher Glass Mfg. Co., Inc. of U.S.A. which had a great name in this line in the international market; and it is on these facts that the Tribunal proceeded to decide the question whether the expenses incurred were on capital or revenue account. In the affidavit of Chandubhai Gordhanbhai Amin it had been pointed out that the company had arranged with Thatcher Glass Mfg. Co., Inc. of U.S.A. to train the employees of the assessee-company in their practical method of manufacturing glass which had a great heat-resisting quality. Accordingly, Mr. P.M. Parikh, an engineer in the employment of the assessee-company, Mr. S. M. Jaiswal, also an engineer of the assessee-company, and Chandubhai, himself the holder of a degree of Master of Science in Glass Technology of the University of Toledo, U.S.A., were deputed by the assessee-company to go to the works of Thatcher Glass Mfg. Co., U.S.A. to stay there and to study and obtain practical knowledge in the manufacture of heat-resisting glass. The affidavit of Chandubhai had also pointed out that the method of making such glass employed by Thatcher Mfg. Co. was the pressing method, which was the method already employed by the assessee-company and the assessee-company continued to employ the same pressing method with the improvements in the method which the three persons deputed by the assessee-company continued to employ the same pressing method with the provements in the method which the three person deputed by the assessee-company learnt in the U.S.A. from the American company. In paragraph 5 of the affidavit, it had been pointed out that there was no switching over to a new method of manufacture but the same method was contained; and the company did not, as a result of the knowledge gained by those persons, commence manufacture of a new line of business; but the company continued the same method as before with the improved knowledge and technique which the trainees had acquired. According to the said affidavit, it was not necessary for the assessee-company to purchase any new machinery for this purpose. In fact, for this purpose no new machinery was required nor was any purchased for this purpose. The result was an imposed article of the same nature as the company was already making by the pressing method. It is thus clear that, as result of the expenditure incurred by the company, the technicians were made more efficient so that they were able to discharge their duties in the company's employment better and the training was for the purpose of acquiring knowledge of the practical working of the manufacture of better heat-resisting glassware. As a result of this expenditure what was acquired was the technical knowledge of more efficient use of the processes and methods, which the assessee-company already had. As pointed out in the affidavit, which the Tribunal accepted as correct, no new machinery was purchased by the company, no new method was employed but as a result of the expenditure, the methods and processes already employed by the company were rendered more efficient so that better heat-resisting glassware came to be manufactured by the company.
10. It is clear in the instant case that the outlay in question was not made for the initiation of the business or for a sub-stantial replacement of the equipment of the business. Thus, the first test mentioned by Mahajan J. in the Full Bench case of Benarsidas Jagannath, In re cannot be applied to the facts of this case. Proceeding, therefore, to the second test laid down by Mahajan J., based on the decision of the House of Lords in Atherton's case, the expenditure was not made for acquiring or bringing into existence an asset or an advantage of enduring nature to the business but was made for running the business with a view to produce more profits and with a view to run the business more efficiently so as to produce higher profits. Thus, no asset or advantage of enduring benefit to the business was acquired or brought into existence. What was being done by the assessee-company, on the fact as found by the Tribunal, was that the expenditure was incurred with a view to acquire practical knowledge of the business of manufacturing better heat-resisting glassware. It would be correct to say, on the facts as found by the Tribunal, that the expenditure was incurred with a view to better utilize all the processes and methods already known to the company and already employed by the company.
11. Under these circumstances, on the fact of this case and applying the principles deducible from the cases cited above, it is clear that the expenditure was incurred by the company with a view to earn profits from the same methods and processes as before. This is not a case where the expenditure was incurred with a view to enlarge the goodwill of the company or to permanently improve the assets of the concern; the incidental result of improvement in the goodwill of the company flowing from the manufacture of a better-type of heat-resisting glassware cannot be said to be the view with which the expenditure was incurred by the assessee-company. Emphasis had been laid by Viscount Cave L.C. in Atherton's case on the view with which the expenditure is incurred; and if the expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade, then it can be considered as properly attributable not to revenue but to capital. In the instant case, the expenditure was incurred not with a view to improve the goodwill of the company but with a view to employ its own processes and methods more efficiently and thus to gain more profits. Thus the expenditure was incurred, to use the language of Dixon J. in Sun Newspapers Ltd.'s case, not for the purpose of acquiring an instrument for earning profits but as a part of the continuous process of the use or employment of the instrument it already had for the purpose of profit-making.
12. It is thus clear that the Tribunal was right in taking the view that it did regarding these items of expenditure. The two sums of Rs. 71,625 and Rs. 50,000 were, therefore, correctly allowed by the Tribunal as items of revenue expenditure so far as assessment year 1961-62 was concerned; and the sum of Rs. 3,489 was also rightly allowed as an item of revenue expenditure so far as assessment year 1962-63 was concerned.
13. We, therefore, answer the questions referred to us as follows :
Question. Answer.For assessment year In the affirmative1961-62 : to both items ofexpenditure.For assessment year In the affirmative.1962-63 :
14. The Commissioner will pay the costs of this reference to the assessee.