INCOME TAX OFFICER v. J.K. SYNTHETICS LTD
[Citation -1986-LL-0411-4]

Citation 1986-LL-0411-4
Appellant Name INCOME TAX OFFICER
Respondent Name J.K. SYNTHETICS LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 11/04/1986
Assessment Year 1976-77
Judgment View Judgment
Keyword Tags expansion of existing business • new industrial undertaking • manufacture or production • depreciation on machinery • test of enduring benefit • collaboration agreement • process of manufacture • excise duty liability • manufacture of cement • reference application • technical assistance • technical knowledge • plant and machinery • revenue expenditure • capital expenditure • payment of royalty • supply of know-how • technical know-how • development rebate • enduring advantage • excise department • state government • business purpose
Bot Summary: The equity portion to be contributed by the assessee company was to be adjusted by the know-how fees that the assessee was to get under the agreement and also by the value of the machinery supplied to the Kenyan project which is joint venture. In these circumstances, we have no hesitation in saying that the ITO misjudged the purpose of the visit of the employees of the assessee company to Kenya and came to an erroneous conclusion that that expenditure was incurred for the purpose of establishing a factory there in Kenya treating the factory as if it is the assessee's own factory. The assessee company explained to the CIT with which he agreed on verification that the assessee was already a manufacture of cement at a place called Nimba Hera in Madhya Pradesh and any expenditure incurred by the assessee in the promotion of its sales was revenue expenditure. The Allahabad High Court held that the assessee acquired ownership rights without any limit of the time and that was not a case where the assessee's entitlement was only to use it as long as payment of royalty is continued. As we have pointed out above, the assessee before us did not acquire ownership rights over the Know-how or the patent right for the simple reason that Tecnimont with which the assessee entered into the agreement did not itself posses those rights except that it acquired a licence to use the experience to impart to others for a fee. The Supreme Court pointed out that if the advantage consists merely in facilitating the assessee's trading operations of enabling the management and contact of the assessee's business to be carried on more efficiently or more profitably leaving the fixed capital untouched, the expenditure would be on Revenue account even though the advantage may accrue for an indefinite future. The CIT after referring to the First Schedule to the Industries Act, 1951 as well as second Schedule to the WT Act, 1957 came to the conclusion that the assessee's claim was fully justified and that the manufacture of machinery to produce man made fibres was through chemical process and the assessee was entitled to the development rebate at the rate of 25 per cent.


CH.G. KRISHNAMURTHY, SENIOR VICE PRESIDENT ORDER This is appeal filed by ITO, New Delhi against order of CIT (A) taking objection to certain reliefs granted by him. This appeal relates to asst. yr. 1976-77 and we will take up points is order in which they are raised in grounds of appeal and dispose them of. 2 . assessee is public limited company doing extensive business of several varieties at kanpur. first objection in this appeal filed by Revenue is against allowance of travelling expenditure by CIT (A) of Rs. 2,38,067. Out of total claim of Rs. 6,37,991 ITO picked out 9 items totalling to Rs. 2,38,067 for disallowance as capital expenditure. His view was that concerned persons, who went abroad and incurred this expenditure were negotiating either for establishment of new industry or for expansion of existing industry and either of them was on capital account and, thus, expenditure incurred in regard could only be considered as capital expenditure. full details for this sum were given in assessment order. They could be categorised into two board heads one was expenditure of Rs. 1,04,710 incurred to go to Kenya and other in regard to either establishment of cement factory abroad or for installation of drought twisting machine involving expenditure of Rs. 73,730 and Rs. 59.025, respectively. We have already referred to how ITO regarded expenditure on all these three counts as capital expenditure but when matter came on appeal before CIT (A), he analysed reasons for this expenditure and found that no capital expenditure was at all involved. In Kenya company called Africa Synthetics Fibre Ltd. Was incorporated, in which assessee had to invest 49 per cent of capital, another 49 per cent was to be invested by Government of Kenya through public sector undertaken called ICDC and balance 2 per cent was to be subscribed by citizens of Kenya. equity portion to be contributed by assessee company was to be adjusted by know-how fees that assessee was to get under agreement and also by value of machinery supplied to Kenyan project which is joint venture. This is clearly provided for in agreement entered into between assessee company and Government of Kenya. CIT (A) pointed out that persons who undertook tour to Kenya to discuss with Finance Minister, Government of Kenya and other high officials was only in connection with supply of machinery or supply of know-how. This purpose of visit was misunderstood by ITO as for establishment of factory in Kenya and, therefore, capital expenditure over looking fact that it was in pursuance of agreement. CIT (A) further found that expenditure incurred by these officials go to Kenya was only to earn revenue income by way of know-how fees from Kenyan company to which assessee company rendered service for erection of their synthetic fibre plant. He also found that know-how fees received was taxed as income in subsequent years of substantial amount namely Rs. 15.43 lakhs in 1977 and bout Rs. 34.60 lakhs in 1979 besides assessee company also exported machinery worth Rs. 42.54 lakhs in 1978 and Rs. 74.74 lakhs in 1979, which was part of assessee's sale proceeds. So executives of assessee company had to visit kenya either to render technical services in erection of plant as per agreement or to earn technical know-how fees. CIT (A) further found that from directors report it was seen that new company referred to above, namely. Africa Synthetics Fibre Ltd. was incorporated in Kenya on 4th Sept., 1975 and that assessee-company was appointed as managing agents for managing project for period of eight years and it was in pursuance of that agreement and with view to manage said company assessee's executive have to visit Kenya frequently. On examination of this evidence CIT (A) gave finding that expenditure incurred by assessee was for purpose of earning income by promotion of its sales and, therefore, expenditure was revenue expenditure. ITO relied upon very strongly decision of Andhra Pradesh High Court in case of Hyderabad Allwyn Metal Works Ltd. vs. CIT (1975) 98 ITR 555. CIT (A) not only distinguished this case but also pointed out that ratio laid down in that case helps assessee on present facts. Against this decision of CIT (A) Department felt aggrieved and filed this appeal. Departmental representative reiterated contention ITO took in his order but fact remains that facts found by CIT (A) were not controverted or even shown to be either non-existent or false. assessee company was having dual role. In these circumstances, we have no hesitation in saying that ITO misjudged purpose of visit of employees of assessee company to Kenya and came to erroneous conclusion that that expenditure was incurred for purpose of establishing factory there in Kenya treating factory as if it is assessee's own factory. He has evidently into with Government of Kenya and how assessee company got involved in that project, which is nothing but promoting sales of assessee's as well as earning technical fees. most important thing to be noted is that assessee company is engaged in fabrication of plant for manufacture of synthetic fibres. plant fabricated by assessee is its stock-in-trade, and any expenditure incurred in selling of stock-in-trade even if selling part includes erection of plant for purpose of client as part of sales cannot but be treated otherwise. than as revenue expenditure. view taken by CIT (A) in respect of this segment of expenditure cannot be assailed. next item of sum of Rs. 73,730 incurred on visit of Shri S. L. Singhania Rs. 43,309 and Shri S. S. Misra Rs. 30,421. reason advanced by t h e ITO for disallowance of this sum was that these persons, who went abroad, submitted report according to which purpose of visit was to contact various fabricators of plant and machinery for cement industry and to further explore possibility of collaboration of fabricating plant and machinery for cement and, therefore, this expenditure was of capital nature. assessee company explained to CIT (A) with which he agreed on verification that assessee was already manufacture of cement at place called Nimba Hera in Madhya Pradesh and any expenditure incurred by assessee in promotion of its sales was revenue expenditure. Another point noticed by CIT (A) of considerable relevance and significance is that assessee was manufacturing portland cement in India and by incurring this expenditure on travel assessee was only seeking expansion of its plant and machinery. That assessee was exploring possibly to expansion of plant and machinery for cement business was not in dispute. In fact it was admitted. Thus, expenditure was in connection with existing line of business although it was for purpose of expansion. It is now trite law that any expenditure incurred in connection with expansion of existing business is revenue expenditure and not capital expenditure if it was on travelling. Here again CIT (A) referred to observations made by Andhra Pradesh High Court in case of Hyderabad Allwyn Metal Works Ltd, case (supra) and held that expenditure incurred in connection with any of business which company was already carrying on was to be allowed as revenue expenditure because purpose of incurring to further expenditure was to increase its profitability i.e., maximise its profits. In appeal filed against this view of CIT (A) noting was mentioned to us by way of finding fault with facts found by CIT (A). All that was urged was that expenditure incurred on expansion of existing plant was to be regarded as capital expenditure and should not have been regarded as revenue expenditure by importing into it theory that for purpose of grant of s. 80J of IT Act, 1961 ('the Act'), relief expansion of existing business was judicially noticed as amounting to establishment of new industrial undertaking and on same analogy expansion should also be considered as new under taking. This argument overlooks fact that purpose of s. 80J was different from considerations to be kept in mind for treating expenditure for purpose of s. 34 of Act as of capital or revenue. revenue expenditure incurred could also be in establishment of new industrial undertaking. Those considerations are therefore, not to be improved here. We are of view that CIT (A) is quite correct in his view and we do not find any occasion to interfere with that conclusion. next batch of expenditure is of sum of Rs. 59,625 made up of Rs. 40,231 incurred by Shri S. R. Singhania and Rs. 19, 394 by Shri B. N. V. Iyengar. Both these expenses were incurred in connection with manufacturing programme of various machines, in particular drought twisting machine. ITO like in other case had considered this expenditure to be capital expenditure because this was for purpose of discussions with foreign companies in West Germany etc., in connection with expansion programme and also to obtain drawings and designs, etc. But what CIT (A) found, which could not now be disputed was that assessee had established already division known as Fibre Technical Engg. Manufacture solely with view to manufacture machines to be utilised for production of on yarn. expenditure incurred by assessee on tour of these two persons was in connection with obtaining of details for proper and efficient running and manufacture of these machines. expenditure incurred in this connection was in connection with existing plant and not with view to set up new plant as was supposed by ITO like in other cases discussed above, In view of this categorical finding by CIT (A) which went undisputed before us, we have no doubt in our mind that this expenditure was rightly allowed by CIT (A) and there was no element of capital expenditure involved in it. Distinction has always to be drawn between expenditure incurred in connection with existing plant or line of business and expenditure incurred in connection with setting up of new plant. While latter is capital expenditure former is revenue expenditure. expenditure disallowed by ITO in all 9 items above falls in former category. This was finding of fact recorded by CIT (A) which Department was not able to dislodge. We are, therefore, of opinion that view expressed by CIT (A) is correct and we confirm it. 3 . Then there is another item of travelling expenditure incurred of Rs. 37,064 which was also disallowed by ITO but allowed by CIT (A). this consisted of four items again : Rs. on travelling of Smt S. M. Lal wife of Shri S. M. 8,000 Lal,General Manager 6,402 on travelling of Smt. Veena Singhania 15,214 on travelling of Shri S. P. Satia 7,448 on travelling of Shri S. R. Singhania reason for disallowance of amount incurred on Smt S. M. lal n d Smt. Veena Singhania was that they were ladies and that they had no business purpose to serve for assessee company to plead that expenses w e r e incurred for purpose of business. Merely because they accompanied their husbands on foreign tours even though it is for business purpose, their did not become business tours. But CIT (A) found following rule laid down by Supreme Court in case of Shahzada Nand & Sons vs. CIT 1977 CTR (SC) 246 : (1977) 108 ITR 358 that expenditure incurred by company on wife of its loyal employees to enable her to accompany him on foreign tour in order that tour of employee was successful could only be regarded as expenditure incurred both by way of rewarding loyal employee and thereby create goodwill amount employees and to encourage other employees through them to work with greater loyalty and devotion. This view is assailed before us by Revenue. It is not disputed that neither Shri S. M. Lal nor Shri Singhania were directors of assessee company, not their relatives. They were only highly qualified technical persons employed over long period of time. Their foreign tours became necessity for purpose of company's business and it also became necessary for their wives to accompany them. We agree with view expressed by CIT (A) that this kind of expenditure would act as incentive for other employees to work with zeal, devotion and dedication which in ultimate analyses results in higher profitability. This expenditure cannot, therefore, be looked at divorced from this angle. Any expenditure incurred with view to keep employees statisfied and to induce them to give their best is expenditure incurred for purpose of business and not de hours business. We also find that this was view expressed by Tribunal in assessee's won case in immediately preceding asst. yrs. 1975-76 in IT Appeal No. 4548 of 1980. In these circumstances, we cannot find exception to view expressed by CIT (A) and we confirm it. That takes us to expenditure incurred on Shri S. P. Satia and Shri S. R. Singhania. reason adduced by ITO was that assessee company did not furnish purpose of visit of these persons abroad while one went to Japan other went to Amirca. When assessee explained to CIT (A) that this allegation was unfair because ITO never asked assessee to explain purpose, it was further explained that Shri S. P. Satia had to go abroad to study latest technology for manufacture of nylon yarn and eventually he was stationed in Kenya or represent interests of assessee-company and Shri S.R. Singhania had gone abroad to settle export of nylon tyre chord and staple fibre. Since both these purposes were exclusively business purposes CIT (A) felt no difficult in accepting assessee's claim and allowing this expenditure. Now Department claim is that CIT (A) was wrong in allowing it but it is not shown to us how he was wrong. These employees undoubtedly went abroad for purpose of business. expenditure incurred cannot, therefore, be said to be otherwise than for business purpose. Department should be able to prove that purposes of these visits was not for purpose of business. To this end no evidence is led before, us. We, are therefore, unable to disagree with CIT (A). He has given very cogent reasons for allowance of this claim. This ground is, therefore, also not accepted. 4 . Before we go to next ground, we must dispose of Departments contention based upon decision of Delhi High Court in Addl. CIT vs. Delhi Cloth & General Mills Co. Ltd. (1983) 144 ITR 280. In this case, Delhi High Court held that expenditure incurred on foreign tours of directors and officers for selection and purchases of machinery and plant for new project formed part of actual cost of machinery and plant and not revenue expenditure. This decision was relied upon to show that view taken by ITO was correct but this decision is distinguishable because unlike in that case here expenditure was incurred not for selection and purchase of machinery for new project but for existing project and this fact makes all difference. 5. next ground relates to allowance of payment of Rs. 30,57,499 paid to company called Tecnimont, SPA Itlay relating to technical know-how and another sum of Rs. 3,48,033 paid to IWKA, west Germany. assessee company with view to erect plant for manufacture of acrylic fibre at Kota entered into collaboration agreement with company called Tecnimont of Itlay and another company called IWKA, West Germany. This agreement was entered into on 29th April, 1974 providing for payment of technical know-how fees. total amount payable expressed in terms of rupees was 54,45,794 or 623 million lire (Italian currency). break up of this was as under: (i) 18 6.5 million lire for grant of process and know-how licence. (ii) 250 million lire for supply of know-how and basic design engineering of plant. (iii) 18 6.6 million lire for supply of technical assistance and continuous know-how in Itlay, including training of company's personnel in Itlay. Out of this 250 million lire payable for supply of basic engineering of plant was treated by assessee company as capital expenditure and remaining two items of 18 6.5 million lire equivalent of which in Indian currency is Rs. 30,57,499 were treated as revenue expenditure on ground that they represented expenditure, for efficient running of business after commencement of production. This plea was based on view that any expenditure incurred on running of business in more efficient manner is always expenditure incurred on revenue account. ITO found on enquiry that erection of factory was not complete and, therefore, there was no question of running business in more efficiently. business not having been started, expenditure incurred could not be said to have been of revenue nature. By referring to certain decision more particularly decision of Supreme Court in CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 ITO disallowed claim of assessee by treating it as capital expenditure. He disqualified this expenditure even from allowance of depreciation and development rabate. This is in main reason that prevailed with ITO to disallow claim. But CIT (A) on appeal took different view. CIT (A) analysed agreement and found certain salient factors having bearing on subject of allowability. He found : 1. Know-how and patent rights for producing acrylic fibre from acrylonitrile monomer were owned by concern known as Montefibre of Itlay, which were successors to another concern known as Chatillion. 2. Montefibre while owing know-how and patent rights had transferred right to license to another concern known as Tecnimont. 3. Tecnimont had experience and capability for providing basic design and technical services for design, erection and operation of plant for manufacturing acrylic fibre. 4. Technimont agreed to grant know-how and patent right and to offer these services to J. K. Synthetics. 5. consideration for use of Know how, basic design engineering and technical assistance was fixed at 623 million Italian lire, consisting of: (a) 18 6.5 million lire for grant of process and know-how license for manufacturing acrylic fibre. (b) 250 million lire for supply of know-how and basic design engineering for setting up plant. (c) 18 6.5 million lire for supply of technical assistance and continuous know-how including training of J. K.'s personnel for running plant. After referring to ratio of several decided case CIT (A) posed question whether what was acquired under agreement was merely license for user of technical knowledge of foreign collaborator. According to him by payment of these sums assessee acquired only license which did not bring into existence as asset of enduring nature. He also found that ownership of technical know-how did not vest in Tecnimont with whom assessee company entered into agreement but ownership vested in another company called Montefibre from whom Tecnimont had acquired right to give on license know-how on patent rights. This is view he held in regard to first payment of 18 6.5 million lire. With regard to payment of other 18 6.5 million lire, CIT (A) held that that was specifically provided for not only technical assistance and continuous know-how to be provided by Tecnimont but also for training J. K. personnel by them. Thus, he held that this was also of revenue nature. Since payments which related to setting up on plant were treated as capital expenditure, theses two amounts, one for use of technical know-how as license fee and other for training of J. K. personnel was of revenue nature. Dealing with question whether expenditure could be allowed in year in which plant did not go into production, CIT (A) relying upon decision of Allahabad High Court in case of Prem Spg. & Wvg. Mills Co Ltd. vs. CIT (1975) 98 ITR 20 held that liability for payment arose under terms of contract in year under consideration and as assessee was maintaining accounts on mercantile basis, amounts were to be deducted in year in which liability arose. He further held that manufacture of acrylic fibre for which payment were made was not different from manufacture of synthetic fibre which assessee-company was already manufacturing and in that sense setting up of plant for acrylic fibre was only expenditure was laid out for existing business activities and, therefore, expenditure was lied out for purpose of earning more profit from existing business. He also ruled that payments made to Tecnimont could not be considered as advance payments because under terms of agreement payments were to be made in accordance with fixed schedule of payment irrespective of period during which services were rendered by Tecnimont. Thus, he held that sum of Rs. 30,57,499 paid to Tecnimont was revenue expenditure. With regard to payment made to IWKA, West Germany of Rs. 3,48,033 CIT (A) found that this was towards know-how fees for manufacture of take-up machines FEM of company, that company entered into collaboration agreement with IWKA, West Germany for manufacture of these machines in Ghaziabad, that plant had already gone into production and that payment of Rs. 3,48,033 was for supply of technical know-how for manufacture of these machines. He examined agreement entered into by assessee-company with IWKA, West Germany and found that assessee-company was granted exclusive manufacturing licence for Indian Union and that assessee was not permitted to use any knowledge or experience gained under this contract for any other purpose. IWKA were to provide to assessee-company following services : (a) Assistance in Germany in planning, construction and installation of J. K.'s engineering workshop; (b) Delivery in Germany of drawings and technical data; (c) Transfer in Germany of use of IWKA manufacturing Know-how; (d) Transfer in Germany IWKA sales know-how; (e) Training of specialists for JK in Germany and India; (f) Delegation of IWKA staff members for technical assistance to India; (g) Exchange of experiences including continued technical assistance and (g) Exchange of experiences including continued technical assistance and development. On these facts he came to conclusion that expenditure on know-how claimed during year under consideration was in respect of business which was already in existence. payments were, therefore, for user of license and were akin to payments made to Tecnimont. He, therefore, allowed this expenditure also. Department is aggrieved by this decision. Departmental representative submitted relying upon judgment of Allahabad High Court in case of Ram Kumar Pharmaceutical Works vs. CIT (1979) 8 CTR (All) 168 : (1979) 119 ITR 33 that by payment of this sum assessee-company purchased outright rights to use technical know-how without any reference to period of time. Thus, assessee became owner of those rights. It is, therefore, not case of payment made for user of licence and consequently decision given by CIT (A) was incorrect. He referred to cls. 2.11 and 2.12 of agreement to support his claim that assessee purchased these rights. Art.s clearly provided that Tecnimont parted with know-how without any limit of time. It was secret and it was non-transferable, permanent and irrevocable. These are all attributes of permanent sale by Tecnimont and permanent acquisition by assessee. assessee having acquired rights as owner cannot but be said to be owner of theses, rights. CIT (A) misappreciated Art.s and erroneously concluded that this payment was for user of licence. This is in brief point made out on behalf of Revenue. On other hand, on behalf of assessee placing very strong reliance on order of CIT (A) and conclusions arrived at by him, it was submitted by Shri Unni that it was Montefibre that was owner of Know-how, that Tecnimont was only licensee from Montefibre with right to sub-lease and when Tecnimont sub-leased to assessee rights it had acquired from Montefibre, it could not be said that Tecnimont sold those rights and assessee had become owner of this tecnical know-how which imply that Tecnimont was owner, when it had only right to sub-lease but not convey title in that know-now. Therefore, argument of Department that assessee purchased technical know-how cannot hold water. right of assessee to use technical know-how was strictly confined to its business needs. It can only be used for existing business, not even for expansion or for new project. Thus, when rights of user were strictly circumscribed, it cannot be said that assessee purchased rights and became owner thereof. Another point made out by Shri Unni was that any improvement that assessee-company makes over technical know-how, that improvement must belong to Montefibre. This situation is inconsistent with theory of outright sale. It was further pointed out that it is wrong to suggest that user was for unlimited period while period was limited to 7 years or in some cases 12 years. Any technical know-how after period to 7 years or for that matter even earlier might became obsolete and may become useless more particularly when sweeping changes are taking place so rapidly in technological world. Nothing can therefore be said to be permanent in sense conferring permanent and enduring benefit by reason of technical know-how. By placing very strong reliance upon decision of Delhi High Court in case of Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746, Shri Unni submitted that if collaboration agreement resulted in absolute transfer of technical know-how to assessee only then assessee could be said to have acquired asset of enduring advantage but where payment is made only for obtaining access to information, which does not become its own, payments cannot be elevated to status of payment of capital nature. It was submitted that neither payments made to Tecnimont nor payments made to IWKA, West Germany could be considered as capital expenditure and that decision given by CIT (A) is just and proper and should be upheld. 6. On 29th April, 1974 assessee-company entered into agreement with Technimont, SPA company situated in Italy. This agreement was called Licence and Technical Assistance Contract, which nomenclature throws certain light on intention of parties. This agreement provided that there was another company called Montefibre, which has successor to Chatilli on, another company, became owner of know-how and patent rights for design, erection, operation and production of acrylic fibre. Tecnimont had only experience and capability for providing basic design and technical services in matter of design, erection and production of acrylic fibre. assessee-company was desirous of setting up plant at Kota, Rajasthan for production of acrylic fibre. Tecnimont expressed its willingness of offer its services to assessee-company for providing technical know-how, basic design and technical services for setting up of plant and operation and was willing to grant those rights and perform said services for assessee- company. It was also prepared to carry out detailed engineering survey needed for this purpose. With this preamble, agreement went on to provide that Technical would grant to assessee-company non-exclusive, non- transferable permanent and irrevocable licence to use process and know-how owned by Montefibre and relevant patent rights. It also granted assessee-company right to sell products in Asia except in some other countries where Montefibre had exclusive rights to sell. Montefibre also agreed to grant to assessee-company non-exclusive royalty-free licence on assessee agreeing to grant to Montefibre exclusive royalty-free licence with right to sub-licence anywhere in world any improvements developed by assessee-company. Tecnimont is to work out basic design of plant on basis of Montefibre technical knowledge to assessee-company. In case of delay in delivery of technical documentation Tecnimont has to competent assessee-company by paying stipulated liquidator's damages. T h e r e is also provision for association of assessee-company's engineers with Tecnimont. Tecnimont shall furnish assessee-company with technical assistance and advice from process point of view in conduction with erection of plant and make available team of experts for erection, e t c . There is also elaborate provision for training of personnel by Tecnimont. Arts. 5.5.1 and 5.5.2 provided that agreement was to last for period of 7 year. advice to be given by Tecnimont was also to last for period of 7 years. Everything that is undertaken by Tecimont to assessee was to last only period of 7 years (see in this context Art. 5.5.1 and 5.5.2). Art. 6.8 provided that in case trial runs after erection of plant result in failure assessee-company and Tecnimont will meet to examine their respective liabilities and come to friendly settlement taking into consideration results obtained by test runs, liability of Tecnimont being limited to financial implication provided under agreement. Art. 8 provided that no expansion of plant or construction of new plant either in India or anywhere in world using process supplied by Tecnimont shall have to be according to separate agreement entered in to with Tecnimont. Art. 9 provided for payment of fees which is in following terms : "9.1 fees to be paid by JK to TEC for use of know-how in India basic design engineering and technical assistance provided for herein is 623 (Six hundred and twenty-three) million Italian lire consisting of : (a) 18 6,500,000, (One hundred eighty-six million five hundred thousand) Italian lire for grant of process and know-how licence under Art. 2; (b) 250,000,000 (Two hundred and fifty million) Italian lire for supply of know-how and basic design engineering as referred to in Art. 3; (c) 18 6,500,000 (One hundred eighty six million five hundred thousand) Italian lire for supply of technical assistance and continuous know-how in Italy, including training of JK's personnel in Italy, as referred to in Art. 5. amounts indicated under (a), (b) and (c) are firm and not subject to escalation." Art. 15 provided for utmost secrecy to be maintained by assessee- company about process, know-how as well as implements. It is on consideration of these important terms in agreement that we have to see whether as contended for by Department assessee-company acquired right for use of technical knowledge so that it could be said that assessee is owner thereof or assessee by making these payments is only allowed access to information which had not become its own. To start with Tecnimont is not owner of this technical know-how at all. ownership of technical know-how belonged to another company called Montefibre. That company owns know-how as well as parent rights. Tecnimont has only right to licence above said know-how. In other words Tecnimont is only licensee of know-how of patent rights owned by Montefibre. grant of licence by Montefibre to Tecnimont was non-exclusive and irrevocable and permanent, i.e., to say Tecnimont can sub-lease or sub-licence those rights to any one it like it is to enable it to do so, grant of licence by Montefibre to Tecnimont had to be permanent and irrevocable. When Art. 2.12 states that Tecnimont grants J. K. non-exclusive non-transferable, permanent and irrevocable licence to us process and know-how to us it appeared that it was only describing nature of licence which Tecnimont obtained from Montefibre which Tecnimont was awarding to assessee-company. Thus, when it was Montefibre which was owner of these patent rights and know- how, when all that Tecnimont had only right to sub-lease it, and when Tecnimont retained to itself exclusive right to sub-licence it to others, it cannot be said that it had sold those rights to assessee-company. This is in our opinion not borne out by agreements nor can that statement be valid statement in law. In this context not has to turn one's attention to cl. 3 of preamble which provided that because Tecnimont owned experience and capability for providing basic design and technical services for design, erection and operation of plant for production of acrylic fibre, that Montefibre granted licence to Tecnimont to use those patent rights. This simply means that it is expertise that Tecnimont had in operation of plant for production of acrylic fibre that assessee-company is trying to acquire by paying fees. Therefore, fees paid are nothing but fees paid for use of experience of Tecnimont whereas right and know-how belonged to Montefibre. This must be clearly borne in mind to understand implication in this case. Once destruction is borne in mind, it becomes clear that assessee was making these payments only for purpose of setting up of plant and operation and training of its personnel. It is also incorrect to state that assessee had obtained without any limit of time technical know-how from Tecnimont. We have indicated above by referring to concerned Art. that period limited was 7 years. Therefore, argument based upon illimitable time is factually incorrect. In case before Allahabad High Court on which greatest reliance was placed on behalf of Revenue, facts there clearly provided that assessee purchased ownership of know-how and data for use by it in future without any limit of time. Contrasting that situation with situation where payment was made for user of data, Allahabad High Court held that when assessee obtains permanent rights over use of know-how it obtains advantage of enduring nature and payment made thereof would be capital expenditure. But that is not so here. There before Allahabad High Court assessee, registered firm, carrying on business in manufacture and sale of saccharin entered into agreement with West German concern. Under agreement, foreign concern was to transfer to assessee know-how and data for constriction and operation of plant for manufacture of saccharine. assessee was to pay foreign concern certain sums and royalty at fixed percentage on sale value without any limit of time but subject to maximum in each year. question arose whether under terms of agreement assessee could be said to have acquired ownership of know-how without any limit of time or merely entitled to use it so long as it continued to pay royalty. Allahabad High Court held that assessee acquired ownership rights without any limit of time and that was not case where assessee's entitlement was only to use it as long as payment of royalty is continued. This was case strongly relied upon by Departmental representative in support of Department's view. But as we have pointed out above, assessee before us did not acquire ownership rights over Know-how or patent right for simple reason that Tecnimont with which assessee entered into agreement did not itself posses those rights except that it acquired licence to use experience to impart to others for fee. Secondly unlike in that agreement, agreement here has set time limit. These two fractures distinguish Allahabad High Court case from case before us. We may also point out that Bombay High Court in very recent decision in case of Addl. CIT vs. Buckau Wolf New India Engg. Works Ltd. (1985) 46 CTR (Bom) 200 : (1985) 157 ITR 751 held that if know-how has been acquired unrelated to secret or patent processes or right to use trade name or trade mark then acquirer of know-how would acquire no asset of enduring nature. If know-how acquired relates to process of manufacturing then payment made for same would to be considered as revenue expenditure. In this case, know-how acquired related to process of manufacture and no trade name or trade mark had been acquired by assessee. Therefore, by application of rule laid down by Bombay High Court, payment made by assessee would fall in category of revenue expenditure and not capital expenditure. We have already referred to above decision of Delhi High Court in Shriram Refrigeration Industries Ltd. where Delhi High Court laid down test as to whether collaboration agreement resulted in absolute transfer of technical knowledge or gaining access to information. former is held to be capital and latter revenue. To our mind agreement provides only access to information and, therefore, this falls in latter category referred to by Delhi High Court and, therefore, partakes character of revenue expenditure. In this context we may usefully refer to ruling to Supreme Court in case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 where Supreme Court laid down latest law on as to when expenditure could be regarded as of bring enduring advantage and when not. Supreme Court pointed out that if advantage consists merely in facilitating assessee's trading operations of enabling management and contact of assessee's business to be carried on more efficiently or more profitably leaving fixed capital untouched, expenditure would be on Revenue account even though advantage may accrue for indefinite future. It, thus, laid down that test of enduring benefit is neither certain of conclusive test and it could not be applied blindly or mechanically without regard to particular facts circumstances of given case. Therefore, old dictum that every enduring benefit will bring in capital asset is no more true not it is available for blind and mechanical application. In this case we find that payment having been made for purpose of acquiring technical knowledge to erect factory and thereafter to operate it and train personnel of assessee cannot be said to be such nature as to bring in enduring advantage. On consideration of above we have come to conclusion that view taken by CIT (A) on all accounts is correct and reserves to be upheld. CIT (A) pointed out that payment could be regarded as payment made for extension of existing business. This point was fairly conceded on behalf of Departmental representative because no arguments were addressed to us on that issue. On contrary, records show that those products were already being manufactured by assessee. If this is situation payment made by assessee to increase its profitability by applying new method of manufacture of process of manufacture, could not be said to be on capital account. Nor is it case of Revenue that liability to pay this amount did not arise in this accounting year. Judged from these consideration and provisions in agreement, we have to view that assessee did not purchase any right in patent right or technical know-how except that it acquired right to use information for user of which it paid fees. We, therefore, agree with view taken by CIT (A) both in regard t o payment made to Tecnimont as well as to IWKA, West Germany and uphold his view. 7 . next objection by Department is to allowance of advertisement charges Rs. 10 lakhs. assessee-company made payment of Rs. 10 lakhs to All India Congress Committee for insertion of advertisement in sovereign polished by A. I. C. C. and claimed deduction of same in computing its income. ITO disallowed claim on ground that payments were not in nature of advertisement. Since donations to political parties were not to be allowed as deduction, he held that amount was disallowable. Aggrieved by this disallowance, assessee appealed to CIT (A) and produced before him proof of insertions of advertisements of products of assessee-company in various languages souvenirs brought out by A. I. C. C. assessee-company then claimed that expenditure was really on advertisement and as there was no prohibition on allowance of expenditure incurred for advertisement, entire amount should be allowed. Then attention of CIT (A) was also invited to instructions issued by CBDT vide their Circular No. 200 dt. 28th June, 1976 See Taxmann's Direct Taxes Circulars, Vol. 1,1985 edn., page 386. CBDT having laid down that expenditure on advertisement in souvenirs should be allowed as deduction n d since enough evidence was produced to show that advertisement were published in souvenirs brought out by A. I. C. C., amount should be allowed as deduction. CIT (A) held that this was case which squarely fall within purview of circular issued by CBDT and as there was no dispute about fact of incurring of expenditure amount was wrongly disallowed. He also observed that ITO erred in holding that this expenditure was in nature of donation in guise of advertisement. It is against this order of CIT (A) that Department has filed this appeal contending that this expenditure should not have been allowed as deduction. controversy before us ultimately related to whether amount paid was by way of donation to political party or whether it was amount paid for advertisement. circular given by CBDT in this connection on 16th July, 1976 is very relevant and is reproduced below : "1. Reference is invited to Board's Circular No. 200, dt. 28th June, 1976[Printed here as clarification 2] by which it was clarified that no distinction need be drawn between expenditure on advertisement in souvenirs and other types of advertisement. 2. question has been raised as to whether assessee can resort to publicity in more that one souvenir published by same institution/organisation. Souvenirs are one of recognized media of publicity. businessman can advertise in more than one newspaper or magazine and also in more than one issue of same newspaper or magazine. Expenditure on such advertisement will qualify for deduction under s. 37(3) r/w r. 6B of IT Rules. Similarly, if advertisement have been released in more than one souvenir published by same organisation, deduction in respect of such publicity will be admissible provided aforesaid conditions are satisfied." - Circular No. 203 - See Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., page 385. This circular issued by CBDT makes it clear that advertisement inserted in souvenirs are recognized modes of publicity and that expenditure on such advertisement would qualify for deduction under s. 37(3) of Act, r/w r. 6 B of IT Rules, 1962. Here there is no dispute that conditions of r. 6B were fully satisfied. In circumstances there should be no objection for allowance of this amount as deduction. We agree with finding given by CIT (A) that this amount was not donation made to political party in guise of advertisement. circular given by CBDT is binding on Department and particularly those circulars which are beneficial to assesses. This was view expressed by Supreme Court as early as in Navnit Lal C. Javeri vs. K. K. Sen, AAC (1965) 56 ITR 198 later repeated in Ellerman Lines Ltd. vs. CIT 1972 CTR (SC) 71 : (1971) 82 ITR 913 and very recently in K. P. Verghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597. In still recent case Madras High Court in case of CIT vs. Sundaram Finance (P) Ltd. (1984) 43 CTR (Mad) 53 : (1985) 154 ITR 564 held that amount spent towards publication of advertisement in several issues of souvenir brought out by Congress Party should be allowed as deduction and it is no ground to say that because souvenirs were related to political party on eve of elections they were in nature of donation and ceased to be advertisement. Madras High Court pointed out that thought advertisement did not bring any direct or immediate benefit it was not impossible that as result of the advertisement, advertiser did not secures new customer, new business and increase its profitability. It also held that circular issued by CBDT referred to by CIT (A) was fully applicable and as per that circular amount should have been allowed as expenditure because that circular is binding on Revenue. Having regard to this we see no reason to reverse finding given by CIT (A) which was in according with circular issued by CBDT. In fact Department should not have felt aggrieved by decision of CIT (A). 8. next objection was to allowance of miscellaneous expenses of Rs. 4,777 consisting of Rs. 2,099 incurred by Shri S. K. Seth, liaison officer of assessee-company for company's work, Rs. 1,678 incurred by Shri Yogender Bhatt employee of assessee in connection with follow up of application for visit of officials of RBI to Kenya and Rs. 1,000 incurred by one Shri Dwarka Nath for purpose of company's business. finding recorded by CIT (A) was that this expenditure was incurred by employees of company for purpose of company's business and as full details were available and as purpose was proved, there was no reason to disallow it. Though Department filed appeal against this allowance, nothing is pointed out to us to enable us to take view different from view expressed by CIT (A). In view of categorical finding given by CIT (A) that this expenditure was for purpose of business we confirm his view on this point. 9 . next item is to allowance of 50 per cent depreciation on machinery installed in premises of J. K. Cotton Mfg. & Spg. Mills Ltd. and Plastic Products Ltd. facts relating to allowance of this depreciation were all mentioned by CIT (A) in his order and it is not necessary for us to repeat them except to state that CIT (A) has followed order of Tribunal in assessee's own case and allowed 50 per cent of depreciation. Since order of Tribunal alone was followed by CIT (A), we cannot take any order of Tribunal alone was followed by CIT (A), we cannot take any exception to it. This ground is therefore rejected. 10. In next ground objection is taken to allowance of legal expenses and reatainership fees paid to tax consultants of Rs. 56,500. details are : Rs. Retainership paid to Dr. R. C. Vaish 20,500 Retainership paid to Shri U. S. Dhusia 36,000 CIT (A) held that Dr. R. C. Vaish and Shri U. S. Dhusia were engaged as retainers of assessee-company for purpose of giving them advice on all matters including tax and amount paid to them could not be considered as amount paid for any proceeding within meaning of s. 80VV of Act and, therefore this fell outside scope of s. 80VV. He also found that whenever they appeared in any proceeding before any IT authority, they were separately paid fees. Though Departmental representative urged before us that this view was incorrect, it has not been shown to us that this amount was paid in respect of any particular proceeding before any IT authority. disallowance was sought to be justified by Department applying provisions of s. 80VV, which is in following terms : "In computing total income of assessee, there shall be allowed by way of deduction any expenditure incurred by him in previous year in respect of any proceedings before any IT authority or Tribunal or any Court relating t o determination of any liability under this Act, by way of tax, penalty or interest : Provided that no deduction under this section shall, in any case, exceed in aggregate five thousand rupees." For this section to apply amount must have been paid in respect of any proceeding before any IT authority or Tribunal or any Court and that proceedings must relate to determination of any liability under Act and that liability must be either by way of tax penalty or interest. Since it is not shown that amounts paid to Dr. R. C. Vaish and Shri U. S. Dhusia were in respect of any particular proceeding, application of s. 80VV is ruled out. In our view payments made by way of retainer fee cannot be said to be in respect of any particular proceeding before any IT authority. This is also view expressed by several Benches of Tribunal and we do not wish to burden this order with citation of all those cases. We therefore express our agreement with view expressed by CIT (A) and decline to interfere. 11. next ground relates to allowance of excise duty liability of Rs. 12,72,762. facts relating to this claim are succinctly put by CIT (A) in his order and they are not in dispute. assessee obtained method as bye- product in process of manufacture of synthetic staple fibre. excise Department levied excise duty on this bye-product at rate of 50 paise per litre w.e.f. 26th April, 1972. This impost was made by Rajasthan state Government. total amount came to Rs. 12,72,762. assessee-company challenged validity of levy through writ petition filed in Rajasthan High Court. Rajasthan High Court allowed assessee's writ petition on 14th May, 1976 but State Government filed special leave petition in Supreme Court. In meantime assessee claimed this sum as liability by debiting in accounts as excise duty payable on methol. ITO disallowed claim on ground that liability ceased to exist in law because of decision of Rajasthan High Court. Supreme Court in meantime admitted special leave petition. Before CIT (A) it was claimed that with admission of special leave petition by Supreme Court, finality of High Court decision was shaken and, therefore, liability continued to exist and in view of decision of Allahabad High Court in case of J. K. Synthetics Ltd. vs. O. S. Bajpai, ITO 1975 CTR (All) 256 : (1976) 105 ITR 864 amount should be allowed as deduction. CIT (A) by referring to facts of that case before Allahabad High Court held that that case fully applied to facts of case and following that decision allowed assessee's claim. It is now pointed out before us that facts in this case are no different from facts obtaining in case before Allahabad High Court. judgment of Allahabad High Court was that notwithstanding appeal filed by assessee resisting claim of excise authorities, that fact by itself did not debar assessee-company from claiming deduction on account of excise duty, which was being demanded from it for which assessee- company made provision in books of account under mercantile system of accounting. High Court pointed out that in case litigation went against assessee, amount could be brought to tax under s. 41(1) of Act and in that view Department would not suffer any loss. Since this case is subject to jurisdiction of Allahabad High Court and since we find that decision of Allahabad High Court applied on all fours to facts of this case, we hold that view taken by CIT (A) is correct and we endorse it with observation that in case matter is decided by Supreme Court against assessee, Department should be able and free to bring this sum to tax under s. 41(1). 12. next item is against question whether cash allowance paid by assessee-company to its employees would be regarded as part of salary or as perquisites for purpose of disallowance under s. 40A (5) of Act. total amount disallowed by ITO and which is now in appeal before us is Rs. 1,47,727. CIT (A) following his earlier order for asst. yr. 1975-76 held that cash payments to employees are not to be treated as perquisites but only as part of salary. He directed ITO to recompute perquisites in light of this direction. Department is in appeal against this direction. But we find that this matter stands concluded by order of Tribunal for immediately preceding assessment year in Income-tax Appeal No. 4548 of 1980 dt. 19th April, 1985, which CIT (A) had only followed. We are also given to understand that Department did not file any reference application against this point. We, therefore, following with respect order of Tribunal hold that view taken by CIT (A) is correct. We may also add that in case of CIT vs. Otis Elvators Ltd. special leave petition filed in Supreme Court on indentical point was also dismissed. This point is, therefore, decided against Revenue and order of CIT (A) is confirmed. 13. next item is in regard to allowance of development rebate in respect of plant and machinery installed in FEM division of Rs. 96,290. assessee installed machinery of value of Rs. 9,62,899 in FEM Division for purpose of manufacture of fibres through chemical process. assessee claimed development rebate on this machinery at 25 per cent but ITO claimed development rebate on this machinery at 25 per cent but ITO allowed only 15 per cent. There was, thus, short allowance of Rs. 96,290. Aggrieved by this disallowance of development rebate assessee applied to CIT (A) and submitted that FEM Division manufactures machines, which are used for manufacturing synthetic fibres. According to s. 33(1) (B) of Act development rebate at 25 per cent is admissible on such machineries if they are installed after 31st March, 1970 provided machinery was installed for purpose of manufacture or production of any one or more of Art.s specified in list in Fifth Schedule of Act. claim of assessee was that its manufacture fell within entry 4 of Fifth Schedule which stands as under : "(4) Industrial machinery specified under heading '8 Industrial machinery', sub-heading 'A. Major items of specialized equipment used in specific industries', of First Schedule to Industries (Development and Regulation) Act, 1951 (65 of 1951)." CIT (A) after referring to First Schedule to Industries (Development and Regulation) Act, 1951 as well as second Schedule to WT Act, 1957 came to conclusion that assessee's claim was fully justified and that manufacture of machinery to produce man made fibres was through chemical process and, therefore, assessee was entitled to development rebate at rate of 25 per cent. conclusion of CIT (A) is opposed by Department in this appeal. We have gone through order of CIT (A) very carefully and we are in entire agreement with view expressed by him. There is nothing brought to our notice by Department to show how and where CIT (A) had gone wrong. We, therefore, endorse view taken by CIT (A) on this point also. 14. next point is whether depreciation of 15 per cent is to be allowed on plant and machinery of synthetic staple fibres and nylon chord divisions. We find that this point is decided by Tribunal in assessee's own case in its favour and against Department in IT Appeal No. 1921 of 1984 dt. 8th July, 1975 for asst. yr. 1972-73. Respectfully following view expressed by Tribunal, we hold that view taken by CIT (A) cannot be said to be incorrect. We, therefore, confirm it. 15. next objection is whether deficiency of s. 80J of Act relating to asst. yr. 1973-74 and 1974-75 is to be set off or not. In those two years profits of those two divisions was not sufficient to absorb relief under s. 80J though it was admissible. In year under consideration as there was enough profit, assessee claimed that deficiency of earlier years should be carried forward and set off. ITO did not accept assessee's claim mainly on ground that for asst. yrs. 1973-74 and 1974-75 assessments not having been finalised, assessee would not be entitled to carry forward deficiency but now we find that this point also has been decided by Tribunal in asst. yr. 1975-76 in Income-tax Appeal No. 4548 of 1980 dt. 19th April, 1985 in favour of assessee and against Department. Respectfully following view expressed by Tribunal we hold that CIT (A) is right in his view. 16. In next ground decision of CIT (A) that FEM and Cement Division should be regarded as separate industrial undertakings and relief under s. 80J should be computed in accordance with law is challenged. It is not necessary for us to recount all facts here because now we are told ITO had himself accepted assessee's claim for asst. yr. 1975-76 and treated them as separate new industrial undertakings. In this view of matter, there cannot be any grievance to Department by view taken by CIT (A). view taken by CIT (A) is, therefore, confirmed. 17. last point is about treating security deposits received for cops of Rs. 1,80,000 as income of assessee. We do not wish to recount again facts relating to this point because here again we find that Tribunal for asst. yr. 1975-76 in assessee's own case decided that these deposits are not in nature of income. is question of treating them as income does not, therefore, arise. What is more we are told that reference application filed by Department was also rejected by Tribunal in Reference Application No. 943 (Delhi) of 1984 dt. 15th Feb., 1985. We, therefore, confirm order of CIT (A) on this point also. 1 8 . Before we part with this order, we would like to place on record our deep sense of appreciation at very elaborate order passed by CIT (A) discussing each and very point thoroughly and lucidly, nor do we refrain from expressing our admirations at able assistance provided to us by both representatives who appeared before us. 19. In result, appeal filed by Revenue is dismissed. *** INCOME TAX OFFICER v. J.K. SYNTHETICS LTD.
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