COMMISSIONER OF INCOME TAX Vs. PRINTPAK MACHINERY LIMITED

JUDGEMENT

(1.) These two references are inter-linked and the following questions have been referred under Section 256(1) of the Income-tax Act 1961 (in short the "Act") by the Income-tax Appellate Tribunal (in short the "Tribunal"). The first question has been referred at the instance of the Revenue, while the second question has been referred at the instance of the assessee.

(2.) The dispute relates to the assessment year 1974-75 and relates to a claim of deduction of Rs. 1,51,500.00 against the business profits on account of fee paid for technical know-how. Assessing Officer disallowed the claim on the ground that though the assessee had paid this amount to its foreign collaborator, the payment was only in the nature of an advance, which had been paid to obtain technical know-how on a future date after the machinery was installed. It was observed that since during the relevant previous year no technical know-how was obtained and no production was carried out, the payment of Rs. 75,500.00 paid during the year, was of a capital nature. Assessee preferred appeal before the Appellant Assistant Commissioner (in short the "AAC"). A plea was raised before the AAC that Rs. 1,51,500.00 was to be allowed as deduction as it was full amount payable to the foreign collaborator, though only Rs. 75,500.00 had been paid during the relevant previous year. Assessee claimed the amount as its liability on the ground that it followed the mercantile system of accounting. AAC looked into the agreement between the assessee and its foreign collaborator. It concluded that what the assessee obtained was the right to manufacture machinery under a licence for a period of five years. Hence the payment was made for the user of the designs and drawings supplied by the foreign collaborator and it was not for the acquisition of any capital asset, which continued to be the property of the foreign collaborator. It was, therefore, held that the payment was not in the nature of a capital expenditure, but was in the nature of a revenue expenditure. Reference was made to Article (7) of the agreement, which envisaged that the amount was to be remitted in two equal instalments. First instalment was to be remitted within 60 days of the approval of the agreement and the second instalment was to be remitted within a period of 12 months from the date of remittance of the first instalment. The agreement was to be operative for a period of five years from its effective date, i.e. the date from which the drawings, etc. were submitted to the assessee. AAC, therefore, concluded that entire payment of Rs. 1,51,500.00 was required to be made for a use of the drawings, etc. and patents of the company for a period of five years. This, according to him, indicated that assessee was entitled to expenditure for a period of one year during the relevant assessment year and the amount in question was Rs. 30,300.00 which was to be allowed. Assessee preferred appeal before the Tribunal claiming that in terms of the agreement between it and the foreign collaborator, a sum of $ 20,000/- has to be paid for the benefits, which assessee obtained under the agreement and those benefits admittedly were of a revenue nature. Since assessee maintained its accounts on mercantile basis, the entire liability had accrued in the relevant previous year and deduction of the full claim ought to have been allowed. Stand of the Revenue, on the other hand, was that the entire expenditure was capital in nature. Tribunal did not permit Revenue to raise this question as it was not in appeal against the finding of the AAC that the expenditure was of a revenue nature. However, it was held that assessee was under an agreement to pay $ 20,000 for technical know-how and assistance. This was a general liability and in terms of the agreement was to be liquidated in a particular manner. The entire liability was not to be considered as accruing in the year of agreement and only 50% was to be met within 60 days of the approval of the agreement by the Government..The Tribunal, therefore, held that amount allowable as revenue expenditure is only Rs. 75,500.00. On being moved by both assessee and Revenue, as afore-stated, reference have been made.

(3.) We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessee inspite of notice. It is submitted by learned counsel for the Revenue that the true import of the agreement was not considered by the Tribunal in its proper perspective. Assessing Officer took note of the fact that the amount paid was in the nature of an advance and therefore could not be treated as revenue expenditure. It was noted that during the relevant assessment year neither technical know-how has been obtained nor any production was carried out. The nature of payment clearly indicated that it was an advance for acquisition at a later date of an asset of enduring benefit to the business and therefore purely an expenditure of capital nature. She, however, fairly accepted that AAC's order to the extent that the expenditure was of a revenue nature was not questioned in appeal before the Tribunal by Revenue. Further there has been no question raised about the legality of Tribunal's refusal to raise that question as an additional ground before the Tribunal. She, however, stated that even if it is not accepted for the sake of argument that the expenditure was of a revenue nature, yet Tribunal has lost sight of the fact that the period of user of the technical know-how was for five years and therefore at the most what the Tribunal could have done was to confirm the conclusions of the AAC and nothing beyond that. We find substance in this plea. Tribunal does not seem to have adverted to this question even if it held that there was no challenge to the AAC conclusions that the expenditure was of a revenue nature. As was observed by the Apex Court in Madras Industrial Investment Corporation Ltd. Vs. Commissioner of Income-tax (1997) 225 I.T.R. 802, ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in.one year might give a very distorted picture of the financial position of the particular year. Section 37(1) of the Act requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of the factual position and by application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, then it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure in such a case may be regarded as revenue expenditure. Meaning of the expression "expenditure must be understood in the context in which it is used in the Statute. Legislature has used the expression "allowance and depreciation" in several Sections in the scheme in Chapter IV of the Act. Section 37(1) enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business or profession should be allowed in computing the income chargeable under the head "Profit and gains of business or profession". In sections 30 to 36, the expression "expenses incurred" as well as "allowances and depreciation" have been used. Therefore, the Legislature was using the expression "any expenditure" in section 37 intended to cover both the categories.