COMMISSIONER OF INCOME TAX Vs. JYOTHI LIMITED

JUDGEMENT

(1.) IN this case, at the instance of the Revenue, the following two questions have been referred to us for our opinion :

(2.) THE assessment years under reference are asst. yrs. 1962 63, 1963 64, 1964 65, 1965 66 and 1966 67. The assessee before us is a limited company and carries on business of manufacturing oil engines, electric motors, pumps, switchgears, etc. It manufactures, inter alia, water turbines, switchgears and switchboards. The contentions raised by the assessee in these matters related to disallowance of certain payments made by the assessee to two foreign collaborators, namely, M/s Gilberts Gilkes & Gordon Ltd., referred to in the record as the English company, and M/s Calor Emag, Germany, referred to in the record as the German company. It must be clarified that the payments in dispute are payments made to these foreign collaborators in respect of drawings, designs, specifications, etc. The collaboration with the English company was in respect of manufacture of water turbines and the collaboration with the German company was for the manufacture of switchgear, switchboards, etc. The details of the amounts paid to the English company and the German company for each of the five years which are under reference and which came to be disallowed by the ITO are as set out in the following table : The contention of the assessee company regarding these payments made to the English company in the years 1964 65, 1965 66 and 1966 67 was that these payments were of a revenue nature but when that contention was negatived and it was held that the expenditures were in the nature of a capital expenditure, the assessee contended that these drawings, designs, specifications, etc., for the manufacture of water turbines supplied by the English company were "plant" and hence the assessee should be allowed depreciation allowance and development rebate in respect of these payments made to the English company. This contention of the assessee was based on the decision of this High Court in CIT vs. Elecon Engineering Co. Ltd. (1974) 96 ITR 672 (Guj). The Tribunal upheld that contention of the assessee and held that the payments in respect of drawings, designs, etc., made by the assessee to the English company were payments of a capital nature and were entitled to depreciation and development rebate, on that basis. In Elecon Engineering Co.'s case (supra), it was held that drawings, patterns, designs, etc., like books, were the embodiments of know how and served the purpose of teaching at long range and there was no reason to exclude these drawings, patterns, designs, etc., from the wide meaning of the term "plant" having regard to the legislative intent to give a wide meaning to the word "plant", and material record of know how (even assuming that know how itself was intangible) was clearly included within the meaning of the word "plant" in S. 32 and it was held that the assessee in that particular case was entitled to depreciation in respect of those assets on the pro rata cost of their acquisiion. It is clear that in the light of this decision in CIT vs. Elecon Engineering Co. Ltd. (supra), once drawings, designs, patterns and specifications and other such embodiments of know how are treated as capital assets and expenditure incurred for the purpose of acquisition of these capital assets is treated as expenditure of a capital nature, the necessary concomitant of so treating these capital assets, that is, drawings, designs, patterns and specifications, etc., would be to treat them as "plant" and hence to make such expenditure admissible for the purposes of depreciation and development rebate. The same conclusion was reached by this Court in CIT vs. S.L.M. Maneklal Industries Ltd. (1977) 107 ITR 133 (Guj) in respect of those items of expenditure which were treated as items of a capital nature. In view of this position emerging from these two decisions of this Court, it is obvious that question No. 2 must be answered in the affirmative, that is, in favour of the assessee and against the Revenue.

(3.) ON these facts, it was held that the expenditure incurred by the assesee for the purchase of workshop designs, drawings and patterns from the foreign owner under agreements for the manufacture of certain machinery, was allowable as revenue expenditure. The agreement with the German company was entered into on November 1, 1959. The assessee company is referred to as licencee and the agreement is to manufacture various types of switchgears and switchboards in India. Article 1 of the agreement, which is annex. D 1 to the paper book, points out :