1. The assessee is a private limited company and has been carring on business in the purchase and sale of handloom clothes, shipping, stevedoring as well as managing agency. On July 21, 1967, it had entered into an agreement with Capelin Associates Limited, Geneva. Switzerland (hereinafter referred to as 'the foreign company'), for the purpose of setting up plant and machinery at Bangalore for manufacturing readymade garments. In accordance therewith, a factory for manufacturing readymade garments was set up during the accounting, year ending December 31, 1967. While determining the total income of the assessee at Rs. 40,52,750 for the assessment year 1968-69, with which we are concerned in this reference, the Income-tax Officer, disallowed, among others, Rs. 4,11,474 representing the aggregate of the amounts paid to the foreign company, according to the terms of the agreement, by way of salary paid to the foreign technicians, the cost of air passage, hotel accommodation, etc., for them. Beside, the Income-tax Officer found that the assessee had employed a portion of the money borrowed by it for investment in the shares of other companies and concluded that the interest paid by it on such borrowals should be allocated between the business income and the income by way of dividends and worked out the interest allocable to the income by way of dividend as 52.90% of the total interest paid and computed the interest on borrowals unutilised for the assessment year 1968-69 at Rs. 5,17,566 after negativing the contention of the assessee that the investment in shares was only an extension of the business activity of the assessee and, therefore, the entire interest should be deducted in computing the business income. While granting relief under section 80M of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), the Income-tax Officer computed the same at 60% of the net dividend, that is to say, Rs. 18,52,198 as against the gross dividend of Rs. 23,69,664. On appeal by the assessee, the assessment was confirmed except that it was found that for the assessment year in question, Rs. 4,83,909 should be substituted for Rs. 5,17,566 being the interest disallowed. Not satisfied with this, the assessee preferred a further appeal to the Tribunal. Before the Tribunal, the assessee raised an additional ground that the relief under section 80M of the Act should have been granted on the gross dividend received by it during the relevant previous year. The Tribunal held that 20% of the expenditure incurred by the assessee by way of payment to the foreign company in accordance with the terms of the agreement should be taken as revenue expenditure and the balance as capital expenditure and further that one-third of the capital expenditure can be taken as adding to the cost of the machinery of the garment factory for the purpose of depreciation. Dealing with the claim for relief under section 80M of the Act, the Tribunal held that the deduction under section 80M should be made on 60% of the gross dividend and, in that view, the Tribunal felt that the consideration of the question, whether the entirety of the interest paid by the assessee on moneys borrowed should be deducted from its business income would be unnecessary, as in its opinion, the result would be the same whether the whole of the interest is deducted in computing the business income or a portion of it is deducted from the gross dividend.
2. Aggrieved by the order of the Tribunal, the Revenue has come up on this reference under section 256(2) of the Act, on the following questions :
'1. Whether, on the facts and in the circumstances of the case and having regard to the terms of the agreement dated July 21, 1967, on the basis of which fees to the foreign company were paid by the assessee, the Appellate Tribunal was right in holding that 20% of the expenditure incurred by the assessee should be taken as 'revenue expenditure' and the same should be allowed as a revenue outgoing
2. Whether, on the facts and in the circumstances of the case, the Appellate tribunal was right in holding that about one-third of the capital expenditure of the amount paid by the assessee to the foreign consultant could be taken as adding to the cost of the machinery of the garment factory for purposes of depreciation
3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the deduction under section 80M should be allowed on the gross dividend income ?'
3. The learned junior standing counsel, Mr. C. V. Rajan, submitted, referring to the terms of the agreement entered into between the assessee and the foreign company, that the Tribunal had arbitrarily apportioned the expenditure and fixed that 20% of the expenditure incurred be taken as revenue expenditure and the rest as capital expenditure without any basis. On the other hand, the learned counsel for the assessee pointed out that predominantly the payments made to the foreign company were in respect of the services rendered relating to the setting up of the plant and machinery for the garment factory and would be revenue expenditure and, in view of the terms of the agreement, the Tribunal cannot be stated to have committed any error in estimating and fixing a reasonable portion of that expenditure, viz., 20% as revenue expenditure.
4. We have been taken through the terms of the agreement entered into between the assessee and the foreign company. A reading of the terms of the agreement shows that provision has been made therein for setting up the plant and machinery for the garment factory and also for rendering service and advice in several matters. The payments made pursuant to the agreement cannot, therefore, be brought entirely and exclusively under the head 'Capital expenditure' or 'Revenue expenditure'. In other words, a portion of the expenditure incurred in connection with the setting up of the garment factory has to be considered as capital, while another portion has to be considered as revenue expenditure. This clearly flows from the terms of the agreement. Clause 1 of the agreement is towards the service rendered for the establishment of the plant for the garment factory consistent with modern production techniques and further provides for special requirements with reference to export and domestic markets. Clause 5 relates to the design of the building for the factory with details specified for attaining maximum productivity. Clause 6 pertains to the details of the initial interim and final layout plans showing the location of all operations, machinery and equipment. Under clause 7 specification of and the procurement of machinery and equipment is provided for. There are also other clauses in the agreement establishing that the expenditure was incurred for such purposes as to characterise them as revenue expenditure. Illustrative of this are clauses 8, 9, 10 and 12 of the agreement. Clause 8 provides for payment in respect of services for selection and indoctrination procedures for direct labour factory personnel. Clause 9 makes provision for matters relating to breakdown of all direct labour functions including station description, method description and quality specifications. Clause 10 concerns itself with the development of an incentive plan for group or individual incentives based on productivity for all direct labour functions. Clause 12 provides for making available provision for continuous monitoring of cost, production, productivity, training and personnel statistics, etc. It is also not without significance that even with reference to some of the terms of the agreement, part of the expenditure would be capital and part revenue. For instance, under clause 3 of the agreement, the foreign company had agreed to provide initial garment designs for all patterns required for the purpose of commencement of production. There is also a term relating to the provision of further pattern adjustments for exports and local markets. A careful consideration of the terms of the agreement clearly make out that payments partaking the character of capital expenditure and revenue expenditure have been therein rolled up together. It is not the case of the Revenue that even in such a case the assessee will not be entitled to an apportionment of the expenditure for the purposes of ascertaining the income. The Tribunal after adverting to the terms of the agreement has estimated that 20% of the expenditure incurred should be regarded as revenue expenditure. This estimate, in our view, appears to be just and reasonable. It has also not been shown how the estimate of 20% of the expenditure as revenue expenditure is erroneous and we are not, therefore, inclined to disturb this estimate arrived at by the Tribunal. On the facts and in the circumstances of this case and having regard to the terms of the agreement between the assessee and the foreign company referred to earlier, we are of the view that the Tribunal was justified in estimating and concluding that 20 per cent. of the expenditure incurred should be taken as revenue and the rest as capital expenditure. We, therefore, answer the first question referred to us in the affirmative and against the Revenue.
5. That takes us on to a consideration of the second question relating to depreciation. The Tribunal, after holding that 20 per cent. of the expenditure incurred by the assessee under the terms of the agreement should be taken as revenue expenditure and the rest as capital, proceeded to state that one-third of the capital expenditure can be taken as adding to the cost of machinery of the garment factory (established) for purposes of depreciation. It is contended on be half of the Revenue that this view of the Tribunal is erroneous. The question of the assessee becoming entitled to depreciation would depend upon whether one-third of the capital expenditure can be taken as adding to the cost of the machinery of the garment factory established by the assessee. That, in turn, would depend upon whether the capital expenditure can be tacked on to the cost of the machinery. From the terms of the agreement referred to earlier and answer to question No. 1, it is seen that at least 80 per cent. of the expenditure had been incurred as capital expenditure. The assessee would be entitled to depreciation on the actual cost of the machinery. Ordinarily, therefore, in this case, the assessee would have been entitled to add the capital expenditure to the cost of the machinery and claim depreciation on that footing. Even so, the assessee had been permitted by the Tribunal to claim depreciation only on one-third of the capital expenditure as added to the cost of the machinery of the garment factory. CIT v. L. G. Balakrishnan & Bros. (P) Ltd. : 95ITR284(Mad) , has laid down that though the accountancy practice is to include as part of the cost, any expenditure incurred in connection with the acquisition of the assets, yet, in view of the use of the expression 'actual cost to the assessee' in section 43(1) of the Act, it would include interest paid by the assessee on the amounts borrowed for the purchase of the machinery, which can be capitalised as part of the cost of the machinery for the purpose of claiming depreciation and development rebate. The Supreme Court in Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) , ruled that interest paid before the commencement of production on amount borrowed by the assessee for the acqisition and installation of plant and machinery forms part of the 'actual cost' of the assets of the assessee within the meaning of that expression in section 10(5) of the Indian Income-tax Act, 1922, and the assessee will be entitled to depreciation allowance and development rebate with reference to such interest also. ClT v. Simco Meters Ltd. : 111ITR113(Mad) , laid down that amounts spent by way of payment to foreign collaborators for technical know-how as expenditure necessary to bring such assets into existence and to put them in working condition would be eligible for depreciation and that those items which are referable or relatable to the erection of the machinery or bringing into existence any of the assets of the company or for putting them in working condition alone can be capitalised. In CIT v. Festo Elgi Pvt. Ltd. : 129ITR499(Mad) , technical know-how supplied to the assessee by a foreign collaborator in the form of blue prints, instructions, technical manuals, etc., have been held to constitute the tools for the carrying on of the business of the assessee and have an enduring benefit and form the cost of the capital assets with which the assessee carried on its business and hence they constitute 'plant' for the purpose of depreciation and, therefore, depreciation and development rebate should be granted on the amount paid to the foreign collaborator for acquiring the technical know-how, workshop, drawings, etc. The Madhya Pradesh High Court in D. & H. Secheron Electrodes v. CIT  132 ITR 1 had occasion to consider the eligibility for depreciation, the payments made under collaboration agreement under which technical know-how was supplied for the erection and commission of the plant. On a consideration of the terms of the agreement, it was found that the payment to the collaborators was in consideration of the supply of technical know-how and the accepted accountancy rule for determining the cost of fixed assets was to include all expenses necessary to bring such assets into existence and to put them in working condition and, therefore, the entire lump sum payment made to the collaborators by the assessee company was for the purpose of bringing the plant of the assessee into existence and to put it in working condition should be included in the actual cost of the plant and machinery, so that the assessee would be entitled to claim depreciation and development rebate thereon. In CIT v. Nirlon Synthetic Fibres & Chemicals Ltd. : 137ITR1(Bom) , the Bombay High Court considered whether the expenditure incurred on the foundation stone-laying ceremony can be added to the cost of the factory building so as to form part of the actual cost of the asset for the purpose of depreciation. It was held that the expenditure incurred on account of the foundation stone-laying ceremony was to be added to the cost of the factory building as the foundation is a part of the construction and the expenditure incurred formed part of the 'actual cost' of the assets to the assessee for the grant of depreciation allowance. We thus find that a wider interpretation has been given to the concept of actual cost of the asset for purposes of depreciation. The tribunal has again estimated that only one-third of the expenditure be taken as adding to the cost of the machinery. This estimate appears to us to be just and reasonable and we are not disposed to disturb the same. In view of the principles laid down in the aforesaid decision, we are unable to disagree with the estimate and conclusion of the Tribunal that one-third of the capital expenditure alone need be taken as adding to the cost of the machinery of the garment factory for the purpose of the claim for depreciation allowance. We, therefore, answer the second question referred to us in the affirmative and against the Revenue.
6. The answer to the last question depends upon the interpretation of section 80M of the Act. The Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT : 118ITR243(SC) , has approved of the view taken by this court in Madras Auto Service v. ITO : 101ITR589(Mad) and held that the deduction permissible under section 80M of the Act is to be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act. In so holding, the Supreme Court also referred to the amendments made several times in section 80M of the Act and the omission to amend the language employed in section 80M, sub-section (1), to override the interpretation put thereon by the courts, which was taken as the legislative recognition of the interpretation by courts. In that view, the Supreme Court held that the full amount of dividend derived should be taken into account without deduction of interest paid on borrowings for acquiring the shares. Even so, we find from a perusal of the order of the Tribunal that it had not considered the question whether the whole amount should be allowed under business. A consideration of that question would be necessary before the assessee can avail itself of the benefit of section 80M of the Act. Since this aspect had not been dealt with by the Tribunal in the course of its order, we are of the view that the matter has to be remitted to the Tribunal for a de novo consideration of this aspect. We, therefore, direct the Tribunal to consider the question whether the whole amount should be allowed under business. Therefore, we return the third question unanswered. We, however, make no order as to costs.