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Commissioner of Income-tax Vs. Aluminium Corporation of India Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 31 of 1964
Judge
Reported in[1973]92ITR563(Cal)
ActsIncome Tax Act, 1922 - Section 10(2)
AppellantCommissioner of Income-tax
RespondentAluminium Corporation of India Ltd.
Appellant AdvocateBalai Pal and ;N.L. Pal, Advs.
Respondent AdvocateDebi Pal and ;R.N. Murarka, Advs.
Cases ReferredAssam Bengal Cement Co. Ltd. v. Commissioner of Income
Excerpt:
- .....of the matter, i hold that the income-tax officer was justified in treating these expenses as of a capital nature.' 2. being aggrieved by the aforesaid decision of the appellate assistant commissioner the assessee preferred an appeal before the income-tax tribunal. the tribunal after discussing the report of the appellate assistant commissioner observed as follows :'we are unable to agree with the view taken by the appellate assistant commissioner on the matter. we do not think that any asset or benefit of an enduring character was brought into existence as a result of the recommendations made by the technical experts of messrs. reynolds metal company. it is true, no doubt, that the technicians suggested some improved methods of manufacture, but the suggestions did not confer any.....
Judgment:

Sabyasachi Mukharji, J.

1. This reference under Section 66(1) of the Indian Income-tax Act, 1922, relates to the assessment year 1955-56, the corresponding previous year being the year ended 31st March, 1955. For the aforesaid assessment year, the assessee had claimed deduction in respect of Rs. 20,065 spent on account of the travelling expenses, etc., of three technicians of Messrs. Reynolds Metal Company of America, who came to India for the purpose of examining the assessee's manufacturing plants. The Income-tax Officer disallowed the expenditure on the ground that it was capital in nature. There was an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that as a result of the recommendations made by the technicians of Messrs. Reynolds Metal Co., the assessee had gained an advantage of a permanent and an enduring nature. It will be necessary to set out the relevant portion of the order of the Appellate Assistant Commissioner:

'7. The next ground relates to the disallowance of a sum of Rs. 20,065 being the fare and other expenses of three technicians of Messrs. Reynolds Metal Company sent out to India for the purpose of examining the appellant's plant. These technicians have submitted very elaborate reports which I will discuss below. Sri Bagadthey argues that these expenses were incurred only to improve the existing plant and that no extension of the plant was involved. In reply to my query Sri N.L.V. Subramaniam stated that the production of the plant rose from 1,700 tons to 2,400 tons per annum as a result of the implementation of the recommendations made by the technical experts. He also stated that the recovery from the rejects increased substantially.

8. I have gone through the reports submitted by the technical experts and in particular the report of Mr. H. W. Shoemaker. He went through various aspects of the manufacturing process like extraction, calcination and recovery of cryolite, etc., and has made recommendations for the substantial increase of the production as well as for the economic running of the plant. In his recommendations on the process of extraction, Mr. Shoemaker has stated that the premixer should be duplicated by anotherunit and that the three autoclaves were not sufficient. He has recommended certain additions to the autoclaves. It is not necessary to discuss the report. in greater detail as it is evident that the recommendations involved extension of the plant, modification of certain items of plant and improved methods of running the plant. Mr. Shoemaker suggested that the recovery of cryolite should be carried out as a bye-product. It is, therefore, clear that a permanent advantage has accrued to the appellant as a consequence of the recommendations of the experts. This advantage is obviously of an enduring nature as can be seen from the foregoing discussion. To put the whole matter in a nutshell, I would describe the expenditure incurred on these extensions as an expenditure incurred for the purchase of technical 'know-how'. As such I would treat this expenditure as having been incurred for acquiring a valuable asset. In this view of the matter, I hold that the Income-tax Officer was justified in treating these expenses as of a capital nature.'

2. Being aggrieved by the aforesaid decision of the Appellate Assistant Commissioner the assessee preferred an appeal before the Income-tax Tribunal. The Tribunal after discussing the report of the Appellate Assistant Commissioner observed as follows :

'We are unable to agree with the view taken by the Appellate Assistant Commissioner on the matter. We do not think that any asset or benefit of an enduring character was brought into existence as a result of the recommendations made by the technical experts of Messrs. Reynolds Metal Company. It is true, no doubt, that the technicians suggested some improved methods of manufacture, but the suggestions did not confer any permanent or enduring benefit to the assessee. The methods suggested could become obsolete and out of date very soon on the evolution of better technique of manufacture. The technical know-how which the appellant-company undoubtedly acquired in consequence of the recommendations made by the technicians cannot, therefore, be regarded as an enduring asset of the appellant-company. We were informed that the output of the appellant's plants rose from 1,700 to 2,400 tons per annum upon the implementation of the recommendations and we have no doubt that the entire expenditure of Rs. 20,065 must be considered as having been laid out wholly and exclusively for the purpose of business and allowable under Section 10(2)(xv).'

3. After an application had been made, the Tribunal has referred the following question under Section 66(1) of the Indian Income-tax Act, 1922:

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure incurred by the assessee amounting to Rs. 20,065 on account of the travelling and other expenses of the three technicians of Messrs. Reynolds Metal Company was notcapital in nature and was allowable under Section 10(2)(xv) of the Indian Income-tax Act, 1922, as a deduction ?'

4. Counsel for the revenue contended that whether an expenditure resulted in bringing into existence an asset or benefit of an enduring or of a permanent nature was a mixed question of law and fact. He contended that in the facts and circumstances of the case the Tribunal was in error in holding that no benefit of an enduring character had been brought into existence as the result of the recommendations made by the technical experts of Messrs. Reynolds Metal Company. According to counsel for the revenue, improved method of manufacture, if as a result of that method there was a substantial increase in the production, would amount to benefit of an enduring or a permanent nature. It was contended that the Tribunal had proceeded on the findings of the Appellate Assistant Commissioner that the technicians for whom the expenditure in question had been incurred had recommended improved methods, these were accepted by the assessee and thereby, according to the counsel for the revenue, the assessee had acquired technical know-how from the foreign party. It was further argued that the Tribunal had not suggested any period when the improved methods would become obsolete to the assessee. It had merely said that these methods would become out of date on the evolution of better technique. It was further submitted that as a result of the improved method the output of the assessee-company had risen from 1,700 tons to 2,400 tons per annum, which would mean nearly a rise of 41 per cent. In the premises it was argued that there Was expansion of the assessee's plants as a result of the recommendation of M/s. Reynolds Metal Co. and the assessee had acquired benefit of an enduring or a permanent nature. In this connection reliance was placed on the decision in the case of Henriksen (H. M. Inspector of Taxes) v. Grafton Hotel Ltd., [1942] 24 T.C. 453, [1943] 11 I.T.R. (Supp.) 10 (C.A.) There the assessee-company was a tenant of a fully-licensed hotel. There was a lease providing that the tenant should pay all charges imposed in respect of the licences by virtue of the Licensing (Consolidation) Act, 1970. On the renewal of the licence in March, 1934, and in March, 1937, sums in respect of monopoly value were imposed, payable in instalments. The company appealed against assessments under Schedule D for the years 1938-39 and 1939-40, claiming that the instalments of 'monopoly value should be deducted in computing the assessments. The Commissioners allowed the appeal. On reference to the High Court, the Court of Appeal held that the instalments were capital sums and that they did not lose their capital nature because the company had undertaken to pay them under its lease and they were not admissible deductions for income-tax purposes. At page 459 of the report Lord Greene M.R. observed: (1) [1942] 24 T.C. 453; [1943] 11 I.T.R. (Supp,) 10 (C.A.).

'The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is short-lived.'

5. At page 462 of the report, du Parcq L.J. observed as follows:

'It is true that the period for which the right was acquired in this case was three years and no more, and a doubt may be raised whether such a right is of 'enduring benefit' or 'of a permanent character'. These phrases, in my opinion, were introduced only for the purpose of making it clear that the 'asset' or 'right' acquired must have enough durability to justify its 'being treated as a capital asset. This is borne out, so far as Lord Clyde's judgments are concerned, by the fact that in Adam's case, the duration of the right acquired was eight years, and that his Lordship there spoke of its 'relatively permanent character'. 'Permanent' is indeed a relative term, and is not synonymous with ' everlasting'. In my opinion the right to trade for three years as a licensed victualler must be regarded as attaining to the dignity of a capital asset, whereas the payment made for an excise licence is no doubt properly regarded as part of the working expenses for the year.'

6. Counsel for the revenue contended that for an asset to be of an enduring or a permanent nature, it was not necessary that the asset should last forever or for a particular length of time. The principles upon which these questions should be decided have been discussed by the Supreme Court in several decisions including the decision in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, : [1955]27ITR34(SC) . There the Supreme Court quoted with approval the observations of Mahajan C.J. in the case of Benarsidas Jagannath, In re, [1947] 15 I.T.R. 185 (Lah.), which is a judgment by the Full Bench of the Lahore High Court. One of the principles enunciated for judging whether an outlay was of a capital or a revenue nature, as has been observed by Mahajan C.J., was that an outlay was deemed to be of a capital nature when it was made for initiation of a business or for expansion of a business or for a substantial replacement of business. Counsel for the revenue contended that the expenditure in this case came within this principle enunciated by the court in the aforesaid decision. In the instant case, however, it appears from the report of Mr. H. W. Shoemaker, technical expert, which was placed before the Appellate Assistant Commissioner that it had merely recommended a better method of operating or economic method of operating the existing plant. It has been stated in the said report that Mr. Shoemaker went through the various aspects of the manufacturing process and made recommendations for the substantial increase of the production as well as for the economic running of the plant. For carrying out these objectives he had recommended certain methods or modes of operation. These were adopted. It was not a case of expansion of any plant. What was done was that the existing method was improved or bettered. If any improved or better method is introduced in the running of the existing plant and some recommendations are accepted with that object in view then, in view of the nature of the industry, in the instant case, incur view, the same cannot be considered to be of a permanent nature. It is true that there is no fixed period to acquire permanency. In this context the Tribunal has also noted the fact, which cannot be ignored that in these days of swift changing methods in technology these ways and methods, suggested by the technicians who had come over from abroad, would, in course of time, become out of date. It has been held by courts that whether a particular expenditure is a capital expenditure or a revenue expenditure should be judged by applying the correct legal principles from a commercial point of view. In the case of Commissioner of Income-tax v. Alembic Glass Industries Ltd., [1969] 71 I.T.R. 752 (Guj.), the Division Bench of the Gujarat High Court had also occasion to deal with more or less a similar case. There the assessee, a company manufacturing glassware, 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 imparted by Thatcher Glass ., : [1971]81ITR243(Cal) , this court had occasion to consider the question of capital and revenue expenditure. It was there held that there was no property right in 'know-how' that could be transferred even in the limited sense. It was further held that one of the primary rules for determining whether a particular expenditure was a revenue or capital expenditure was that the court from the terms of the agreement between the parties and from the surrounding circumstances had to ascertain the purpose for which it was being incurred. If the expenditure was so related to the carrying on or the conduct of the business that it might be regarded as an integral part of the profit earning process, it should be held to be a revenue expenditure. Should, however, the purpose be the acquisition of an asset or a right of a permanent character the possession whereof was the condition precedent or the prerequisite to the commencement or continuance of the business, the expenditure would be a capital expenditure.

7. Having regard to the aim and purpose of the expenditure in theinstant case and having regard to the facts and circumstances of the casewe are of the opinion that the Tribunal came to the correct decision inthis case in allowing this expenditure. We, therefore, answer the questionreferred to us in the affirmative.There will be no order as to costs.

Sankar Prasad Mitra, C.J.

8. I agree.


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