JONAS WOODHEAD AND SONS LIMITED MADRAS JONAS WOODHEAD AND SONS LIMITED MADRAS Vs. COMMISSIONER OF INCOME TAX MADRAS:COMMISSIONER OF INCOME TAX TAMIL NADU III MADRAS

JUDGEMENT

(1.) These two appeals by special leave at the instance of the assessee are directed against the order of the Madras High Court answering the question posed in favour of the revenue and against the assessee. The Income-tax Appellate Tribunal, Madras Bench, referred the following question to the Madras High Court for its opinion:

(2.) The aforesaid question of law arose out of order of the Appellate tribunal arising out of assessment proceedings for the assessment years 1967-68 and 1968-69. The assessee, a limited company incorporated in March, 1963 to carry on the business of manufacture of automobiles springs entered into an agreement with M/s. Jonas Woodhead and Sons Ltd., (hereinafter referred to as "foreign company") of United Kingdom for manufacture of all types of springs and suspension for road and rail vehicles. Under the terms and conditions of the agreement between the parties it was stipulated that the foreign firm will give the assessee the technical information and know-how relating to the setting up of a plant suitable for manufacture of the products as well as the technical know-how relating to the setting up of the plant itself, the drawings, estimates, specifications, manufacturing methods, blue prints of production and testing equipment and other data and information necessary to manufacture the product and to set up proper and efficient plants. The said agreement between the parties also provide that in consideration of the information to be furnished and services to be rendered to the assessee by the foreign firm the assessee shall pay a royalty at the rates of the licensed products, turnover of the assessee to be calculated in accordance with the provisions of the agreement. The production of the assessee commenced on 1-1-1996 and in terms of the agreement the assessee made payments of Rs. 24,000/- and Rs. 47,000/- respectively to the foreign firm for assessment years 1967-68 and 1968-69 as royalty. In the assessment proceedings the Income-tax Officer disallowed 1/4th of the aforesaid payments on the ground that such payment represented the consideration for service provided by the foreign company of an enduring nature and is, therefore, a capital receipt. The assessee preferred appeals before the Appellate Assistant Commissioner and being unsuccessful therein preferred second appeal to the Income-tax Appellate tribunal. The tribunal having dismissed the second appeal an application was filed by the assessee under Section 256(1) of the Income-tax Act for referring the question of law as already indicated to the High Court of Madras of being answered. The High Court by the impugned judgment answered the question in favour of the revenue and against the assessee. The assessee thereafter moved this Court and on leave being granted, these appeals have been registered. In answering the question posed in favour of the revenue the High Court considered the different clause of the agreement between the parties and is of the opinion that the assessee acquired a benefit of enduring nature which will constitute "acquisition of an asset and amount paid for the same would constitute capital expenditure". The High Court also came to the conclusion that the payment stipulated under clause 12 of the agreement by the assessee to the foreign firm was not the remuneration for using of the rights granted by the foreign firm but a composite payment for all the services rendered and information furnished by the said foreign firm to the assessee in the setting up of the factory as well as in the manufacture of the licensed products in that factory. The judgment of the High Court has since been reported in (1979) 117 ITR 55 (HB) Mrs. Janaki Ramachandran, the learned Counsel appearing for the appellant contended that the High Court was in error in answering the question in favour of the revenue on a finding that the payment was made to foreign company for obtaining advantage of enduring benefit in as much as it does not offer advantage of enduring nature acquired by an assessee which could be held to be a capital expenditure. According to the learned Counsel the payments made by the assessee to the foreign firm for the technical know-how and assistance rendered by the said foreign firm enabled the assessee to carry on its business more efficiently and more profitably leaving fixed capital untouched and, therefore, the said payment or any part of it cannot be held to be a capital expenditure. In support of this contention reliance was placed on the decision of this Court in the case of Empire Jute Co. Ltd. v. Commr. of Income-tax, (1980) 124 ITR 1 . According to the learned Counsel for the appellant a technical know-how or technical advice received from a foreign firm cannot be held to be a tangible asset and any payment made to the foreign firm for such know-how is nothing but a revenue expenditure. The learned Counsel places reliance on the decision of Bombay High Court reported in (1980) 123 ITR 538 (539). The learned Counsel also urged that the payment required to be made by the assessee to the foreign firm was merely for the better conduct and improvement of the existing business and as such was revenue in nature and cant held to be a capital expenditure.

(3.) Mr. Choudhary, the learned, Counsel appearing for the revenue on the other hand contended that the question whether a particular payment made by the assessee would form a part of revenue expenditure or capital expenditure would depend upon the relevant facts and the terms and conditions of the agreement between the parties under which the payment is made. According to the learned Counsel the various clauses of the agreement having been analysed and the tribunal having found that the foreign firm not merely provided the technical know-how for manufacturing the product but also gave plan and designs and established the factory for manufacture of the products and the business concerned being totally new business and even after the conclusion of the agreement period the assessee was required merely to return the plans and designs but there was no embargo on the assessee to manufacture the product in question and the payments under the agreement being of a composite nature the tribunal was fully justified in holding the part of the payments made by the assessee did form the capital expenditure and the High Court was wholly justified in answering the reference in favour of the revenue.