D.S. MEENAKSHISUNDARAM, J.M. ORDER appellant is public limited company, which manufactures road making machinery and other construction machinery. This appeal arises out of its income-tax assessment for year 1 982-83, for which previous year ended on 31 st Dec., 1 98 1 . ITO made original assessment in this case on 28th March, 1 985 under s. 1 43(3) of IT Act and determined total income at Rs. 8,94,2 1 3, as against net loss of Rs. 2,37,890 claimed by appellant. assessee took up matter on appeal, and by his order dt. 2nd Aug., 1 985, CIT(A) directed ITO to apply his mind to three vital aspects regarding sum of Rs. 8, 1 2,095, which was claimed by of appellant as deduction and which represented total technical know-how fee paid by it. He, therefore, directed ITO to study two technical know-how agreements and to ascertain amount of deduction to be granted on account of technical know- how fee for asst. yr. 1 982-83. 2 . Thereafter, ITO passed fresh order giving effect to appellate order of CIT(A), on 25th Nov., 1 985. In this order, ITO determined total income of assessee at Rs. 7,03,090. While passing this order, ITO held that assessee was not entitled to any deduction on account of technical know how fees payable to German Collaborators DEMAG and Weyhausen in present accounting year and that further, payments made by assessee were capital expenditure. 3. Aggrieved by this order, assessee again filed appeal objecting to disallowance of Rs. 8, 1 2,095 by ITO. assessee contended that this amount paid by it for acquisition of technical know-how from two German Companies was admissible as revenue expenditure. expenditure so claimed by assessee consisted of following two amounts : D.M. Amount paid to West 50,000 in German company-called West (1 Rs. 1 (1 Rs. 1 Demag Baumach Inen German ) ,85,724 GMBH, Federal Republic of Currency Germany (Demag, for short). equivalent to D.M. Amount payable to 1 ,50,000 another company-called in West F.Weyhausen KG. Machinan Rs. (2) German fabric, Wildeshausen Federal 6,26,37 1 currency Republic of Germany equivalent (Weyhausen, for short) to Rs.8, . . . 1 2,095 4 . After examining appellant's contentions, CIT(A) accepted assessee's claim for deduction of sum of Rs. 1 ,85,724 paid to Demag, as admissible revenue expenditure in year under appeal. However, in respect of other amount of Rs. 6,26,37 1 payable to Weyhausen, CIT(A) held that on facts of case it was quite clear that it could not be allowed either on cash basis or on mercantile basis in hands of assessee in present asst. yr. 1 982-83. This point is dealt with by CIT(A) in paragraphs 1to 1 8 of his appellate order. In para 1 2, CIT(A) states that he requested assessee to specifically let him know basis for making claim of D.M. 1 ,50,000 in accounting year ended 31 st Dec., 1 98 1 and that assessee replied that production of wheel loaders started in calendar year 1 98 1 and that was why it made claim in present accounting year ended 31 st Dec., 1 98 1 . He further stated that when he asked for exact month in which production of wheel loaders was started, appellant replied that production was started in Nov., 1 98 1 . It was also stated that though production was started in Nov., 1 98 1 , remittance was postponed to March, 1 982 since Income-tax Department and Reserve Bank of India took time to give 'no objection certificate' and that in accordance with its usual practice of mercantile system of accounting, it made entire claim of D.M. 1 ,50,000 in this accounting year, since it was year of actual manufacture of wheel loaders. 5. After examining printed balance-sheet of company pertaining to calendar year 1 98 1 , CIT(A) held that according to note 1of "notes on accounts", assessee did not produce even single item of "Hydraulic self propelled loaders" in this accounting year. According to him, it was quite clear that company did not start manufacture of wheel loaders in accordance with agreement even till 26th April, 1 982, on which day directors submitted company s accounts to shareholders. After referring to Director s report, CIT(A) held that it was quite clear that as on 31 st Dec., 1 98 1 and even as on 26th April, 1 982 assessee only received drawings and designs from Weyhausen, but that assessee did not start even trial production, not to speak of commercial production of wheel loaders, which are also known as Front End Loaders, or as Hydralulic Self Propelled Loaders. CIT(A) next pointed out that according to cash system of accounting, payment of D.M. 50,000 made to Weyhausen pertained to asst. yr. 1 98 1 - 82 and payment of D.M. 1 ,00,000 pertained to present asst. yr. 1 983-84 and that neither of these payments pertained to present asst. yr. 1 982-83. He further held that even according to appellant's own mercantile system of accounting, claim of either D.M. 50,000 or D.M. 1 ,00,000 did not pertain to asst. yr. 1 982-83, but it pertained to future asst. yr. depending on actual date of production. CIT(A) was of view that perhaps appellant was anxious to make provision in its accounts prematurely in present asst. yr. 1 982-83 itself for sum of D.M. 1 ,50,000, because assessee changed its 'Previous year' from calendar year to year ending 30th June, and therefore, there would be no assessment for asst. yr. 1 983-84 at all. He also referred to fact that appellant-company got amalgamated with its holding company, called Marshall Sons & Co.(India) Ltd., whose head office is at Calcutta, and that said amalgamation was effective from 1 st Jan., 1 982. CIT(A) held that it would be significant to note that by time appellant made remittance D.M. 1 ,00,000 to Weyhausen in May, 1 982 (which learned counsel says, should be March, 1 982), assessee already got amalgamated with its holding company and that it was holding company (the amalgamated company) which really started manufacture of wheel loaders. CIT(A) further held that it appeared to him that assessee was quite anxious to get deduction of DM 1 ,50,000 in its own assessment to avoid any uncertainty, but that whatever might be motive of assessee, on facts it was quite clear to him that this claim of D.M. 1 ,50,000 could not be allowed either on cash basis or on mercantile basis in hands of assessee in present asst. yr. 1 982-83. In this view of matter, he did not go into question whether this payment represented capital expenditure or revenue expenditure, as he was of view that this issue would have to be decided for future assessment year in hands of holding company, perhaps by ITO at Calcutta. appellant feels aggrieved by this order of CIT(A) and has come up on further appeal to Tribunal. 6. Shri B. Balasubramaniam, learned counsel for appellant relied on cl. 7 of know-how licence agreement dt. 27th July, 1 978 as amended by further agreement dt. 1 6th March, 1 979 entered into between appellant and Weyhausen and submitted that amount of DM. 1 ,50,000 had become due from appellant to Weyhausen during accounting year ended 31 st Dec., 1 98 1 when appellant company commenced production of this AR 6 1 Loaders and that it had become its liability under scheme of payment specified in art. 7 of said agreement. Shri Balasubramaniam submitted that first amount of DM 50,000 paid by appellant in Sept., 1 980 could not have been claimed by appellant in earlier years since said amount was advance liable to forfeiture if agreement was prematurely terminated. He further submitted that second and third instalments of DM 50,000 each would go together by virtue of agreement and conditions imposed for these two payments were fulfilled in accounting year. According to Shri Balasubramaniam, documents containing complete set of manufacturing drawings were handed over to appellant in February 1 98 1 and that appellant had commenced production of this product in Oct., 1 98 1 as could be seen from issue of materials to shop floor. He pointed out that copies of vouchers for materials issued from stores on 22nd Oct., 1 98 1 and 29th Dec., 1 98 1 at page 23 of assessee's paper book clearly established that appellant had commenced production of this product as per agreement during accounting year. He next referred us to copy of purchase order dt. 1 th Nov., 1 98 1 placed by appellant-company on Weyhausen at pages 24 to 27 of paper book and pointed out that this further established that appellant had placed order for import of raw materials and components for manufacture of AR 6 1 Front End Loaders during accounting year. He also relied on two certificates one dt. 1 7th June, 1 986 issued by Dy. General Manager (Works), and other dt. 1 8th June, 1 986 issued by Financial Controller of appellant to show that production of Hydraulic Front End Loaders had commenced in Oct., 1 98 1 and that value of Rs. 5 1 , 1 69 being work-in-progress in respect of same formed part of total of Rs. 6 1 , 1 7,226 as per balance-sheet as at 31 st Dec., 1 98 1 . He also relied on order received by appellant from Hindustan Construction Co. Ltd., Bombay, dt. 28th Dec., 1 98 1 for supply of one Marshall AP-6 1 Front End Loader, by end of February 1 982. learned counsel, however, fairly stated that appellant-company supplied this Front End Loader only in Aug., 1 982, as necessary components ordered from Weyhausen in Nov., 1 98 1 were received only in April, 1 982. 7. Relying on above materials, learned counsel argued that in order to give effect to art. 7 of agreement, date on which liability arose would be date of commencement of production and not any other date. learned counsel challenged findings of CIT(A) and submitted that as matter of fact appellant-company had remitted entire amount of D.M. 1 ,50,000 in Mar., 1 982 after obtaining clearance from ITO and Reserve Bank of India, but before import of components and assembling of final products. He further contended that Directors' report relied on by CIT(A) to draw adverse inference against appellant was actually in favour of appellant's contentions. He further argued that reference to change in accounting year and amalgamation of appellant company with its holding company were neither relevant nor material for admissibility of appellant's claim. He therefore argued that on terms of agreement entered into by appellant with Weyhausen, appellant was entitled to claim this deduction in this year, as liability to pay this amount had arisen under art. 7 of agreement and that CIT(A) ought to have accepted appellant's claim for deduction in this year. He contended that findings of CIT(A) to contrary and to effect that it would come up for consideration in future assessment year in hands of amalgamated company, was erroneous and that same should be reversed. 8. learned counsel further submitted that so far as present item of end product to be manufactured, there was no trial production involved and that it was regular commercial production, where cost of Front End Loader manufactured was nearly Rs. 5 lakhs. Shri Balasubramaniam submitted that such trial production was not possible or feasible in present case. He submitted that decided cases related to cases of setting up new business or commencement of new business and therefore would be of no help in deciding issue in present case. He submitted that release of drawings and designs and raw materials to shop floor in Oct., and Dec., 1 98 1 would be first step in production of this item and that, therefore, appellant would be entitled to make this claim in year under appeal. He therefore argued that CIT(A) ought to have allowed assessee's claim in this year. 9 . Shri S.V. Jagannathan, learned Departmental representative, who argued appeal on first occasion relied on findings of CIT(A) and submitted that appellant's claim for deduction in year of appeal had been rightly negatived, as nothing had happened, much less production of article covered by this agreement had been completed during year under appeal to entitle appellant to claim this amount in this year. He pointed out that when appellant paid first instalment of D.M. 50,000 in Sept., 1 980, it was paid only as advance and that said payment was not in year of account, but in earlier year. He next submitted that second instalment was due according to agreement in Feb., 1 98 1 on handing over of complete set of manufacturing drawings, but on facts found by CIT(A), second and third instalment were paid together only in March, 1 982, which fell outside accounting year under appeal. He further pointed out that Directors' report extracted by CIT(A) in paragraph 1 3 of his order only showed that some drawings had been released to shop floor and that some orders were placed for import of components and raw materials from Weyhausen. learned Senior Departmental representative submitted that Weyhausen. learned Senior Departmental representative submitted that these acts would not amount to commencement of production as contemplated either in agreement or in law. He submitted that unless end product to be manufactured under this know-how Licence agreement, namely Front End Wheel Loaders APPEAL. 6 1 were fully manufactured, it could not be held that the appellant had commenced production of this product in satisfactory. Shri Jagannathan pointed out that on appellant's own admission, first APPEAL, 6 1 Wheel Loder was manufactured only in Aug., 1 982 and supplied to Bombay party and that therefore production was only in next accounting year and not in year under appeal. He therefore submitted that findings and conclusion of CIT(A) in this regard were correct and that same should be upheld. learned departmental representative further pointed out that facts referred to by CIT(A) namely change in accounting year of appellant, as well as its amalgamation with its holding company as on 1 st Jan., 1 982 were all very relevant and material facts in context of present claim of appellant and that he CIT(A) had rightly referred to same. He further submitted that in view he had take on facts about allowability of appellant's claim in year under appeal, CIT(A) had not examined appellant's claim for deduction as revenue expenditure on its merits, as this amount has been disallowed by ITO on merits by treating it as capital expenditure. In case Tribunal came to conclusion that appellant is entitled to make this claim for deduction in year under appeal, learned departmental representative submitted, then matter may have to be sent back to CIT(A) for further examination of appellant's claim for deduction on its merits as to whether it is revenue expenditure of capital expenditure. 10. We have carefully examined contentions of parties in light of materials placed before us. In our view, answer to problem posed in present case is directly given by decision of Madras High Court Addl. CIT vs. Southern Structuarls Ltd. ( 1 977) CTR (Mad) 279:( 1 977) 11ITR 1 64 (Mad). In said case, assessee company had entered into contract with Government of India, Ministry of Railways for manufacture and delivery of 250 railway wagons according to specifications provided by Ministry. This contract was entered into on 1 3th Jan., 1 957. assessee manufactured proto-type wagon for approval of representative of Government. On approval of wagon on 1 4th Jan., 1 959 with certain rectification s, assessee was authorised to go in for production. assessee thereafter manufactured wagons and first batch of six wagons was delivered on 1 4th Aug., 1 959. assessee claim relief under s. 84 of IT Act, 1 96 1 for 1 964-65 was rejected by Department authorities in view that assessee had commenced manufacture in calendar year 1 958 relevant for asst. yr. yr. 1 959-60 and that relief would be available upto asst. yr. 1 963-64 and hence no relief was admissible for 1 964-65. Tribunal, however, held that assessee could not be said to have begun manufacturing or producing wagons in any commercial sends in calendar year 1 958, relevant for asst. yr. 1 959-60 and hence assessee was entitled to relief for asst. yr. 1 964-65 as well. On reference to High Court at instance of departmental representative, their Lordships of Madras High Court upheld order of Tribunal. At page 1 67ofthe reports, their Lordships held as for allows: "There can be no dispute about fact that article that is relevant in context of present case is wagon as such. Production of proto-type is not production of article as such, because if Ministry of Railways had rejected proto-type or had suggested substantial modifications thereto, then it would not have been possible for assessee to go into production of wagons in accordance with proto-type already produced and process of manufacture in accordance with rectified type of wagon would take some further time. Therefore, mere manufacture of proto-type would not be enough to show that assessee head begun to manufacture or produce articles. manufacture or production of articles must be in some commercial sense." After referring to decision of Bombay High Court in CIT vs. Hindustan Antibiotics Ltd. ( 1 974) ITR 548 (Bom), their Lordships held as follows at page 1 68: 'The test as propounded above shows that it is not necessary to9 find out as to when assessee commenced manufacturing operations as such, but to find out as to when assessee began to manufacture or produce articles as such, but to find out as to when assessee began to manufacture or produce articles as such. mere manufacture of prototype may have resulted in commencement of operations, but that would not be enough, as actual commencement of manufacture or production of articles is test. passage quoted above made s it clear that articles contemplated are articles of finished products for whose manufacture and sale undertaking has come ITO existence. We are in complete agreement with this view." 1 1 . When we examine facts of present case in light of aforesaid ratio of decision of Madras High Court we have no hesitation in coming to conclusion that CIT(A) has rightly rejected appellant's claim for deduction in year under appeal namely asst. yr. 1 982-83 relevant for accounting year ended 31 st Dec., 1 98 1 . There is no dispute that know- how licence agreement with Weyhausen was entered into for manufacture, use and sale of "Wheel loaders AN. 6 1 " which are described as "contractual Products" in said agreement entered into by appellant with Weyhausen on 27th July, 1 978. Art. 7 of original agreement dt. 27the July, 1 978 relating to payment reads as follows: "Article 7- Payment. Down Payment. For supply of drawings and other documents by Weyhausen on basis of present agreement and for conveyance of technical know-how in connection with contractual product, Marshall shall pay lumpsum of DM 1 50,000 in total which will be effected as follows: 1 /3 DM 50,000 to be transferred immediately after signature of this contract by both parties. Marshall shall not be entitled to return of sum of if for any reason this agreement should be prematurely terminated. 1 /3 DM 50,000 to be transferred at handing over of complete set of manufacturing drawings. Marshall shall not be entitled to return of sum if for any reason this agreement should be prematurely terminated. 1 /3 DM 50,000 to be transferred at commencement of production and assembly of product latest 1 2 months after handing over of set of manufacturing drawings. Marshall shall not be entitled to return of sum if for any reason this agreement should be prematurely terminated. Marshallis obliged to secure payment of this DM 50,000 by corresponding band guarantee issued by bank of Fedral Republic of Germany at date of second payment which is due at handing over complete set of manufacturing drawings. Remittance shall be made to one of Weyhausen's accounts in Federal Republic of Germany." (Underlined italicized in print supplied) This art. 7 was amended on 1 6th March, 1 979 in following manner by parties, as could be seen from annexure at pages 1 9 and 20 of papers filed by assessee: "4. In original agreement under art.7 third instalment of DM 50,000 was to be made latest 1 2 months after handing over set of manufacturing drawings. This shall now read: 1 /3-DM50,000 to be transferred at commencement of commercial production and assembly of product, immediately after receipt of necessary components imported from Weyhausen. Marshall shall not entitled to return of sum if for any reason this agreement should be prematurely terminated. Marshall is obliged to secure payment of this DM 50,000 by corresponding band guarantee issued by band of Federal Republic of Germany at date of second payment which is due at handing over complete set of manufacturing drawings. Remittance shall be made to one of Weyhausen's accounts in Federal Republic of Germany." (Underlined italicised in print supplied) Considerable stress is laid by learned counsel for appellant on words "the commencement of commercial production and assembly of product" in this art. 7 which we have quoted above, to contend that since assessee had commenced production of this product by issue of drawings and some materials to shop floor in Oct.,/Dec., 1 98 1 assessee is entitled to made this claim for deduction in this year. assessee further relies on placing of order with German company in Dec., 1 98 1 for import of component parts. But all these facts admittedly do not establish complete production of final 'product, namely AR-6 1 Wheel Loader by appellant company. Even if we go by materials placed by appellant's learned counsel in form of certificates from Dy. General Manager (Works) and Financial Controller, Hydraulic Front End Loader was still in form first Stage of work-in-progress and was not in form of final end product namely AR.6 1 Hydraulic Front End Loader, as contemplated in agreement. Their Lordships of Madras High Court have pointed out that articles contemplated are articles of finished products for whose manufacture and sale new industrial undertaking has come into existence in case of Southern Structurals Ltd. same principle, in our view, would apply to interpretation of this agreement entered into between appellant company and Weyhausen on 27th July, 1 978 as amended in 1 979. Any other interpretation would lead to absurd result and would be opposed to facts. IN fact first AR.6 1 Front End Loader was manufactured by appellant-company and supplied to its customer, Hindustan Construction co. Ltd. Only in Aug., 1 982, which falls in next accounting year relevant for asst. yr. 1 983-84 and not in year under appeal. certificate of Dy. General Manager (Works) shows that there was inspection of Front End Loader manufactured by assessee by technical representative of foreign collaborators and that same was cleared for despatch only in Aug., 1 982. We have already referred to fact that components for manufacture of this product were imported by appellant from West Germany and that they were received in India by appellant only in April, 1 982. Directors report for calendar year 1 98 1 , which has been extracted by CIT(A) in para 1 3 of his order clearly established that Front End Loaders were not manufactured during accounting year 1 98 1 , but that drawing for same received from Weyhausen were still at stage of scrutiny by Design Department of assessee-company before release to shop floor. At another place, Directors state that drawings had also been released to shop floor and necessary arrangements for import of raw material components for assembly o f these Front End Loaders were made. This report is dt. 26th April, 1 982. Therefore, on above facts, it is futile for appellant to contend that it had manufactured Fron End Loader during calendar year 1 98 1 only to be eligible for deduction of this amount in asst. yr. 1 982-83. We, therefore, respectfully follow decision of Madras High Court referred to above, and applying ratio of said decision to facts of present case hold that the assessee is not entitled to deduction of this amount of DM. 1 ,50,000equvalent to Rs. 6,26,37 1 in computation of its income of asst. yr. 1 982-83 and that CIT(A) rightly rejected its claim for this deduction in this year. Accordingly, appeal is dismissed. *** MARSHALL SONS AND CO. (MFG) LTD v. INCOME TAX OFFICER