COOPER ENGINEERING LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference made under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), the Tribunal has referred the following two questions to this court :

(2.) THE facts leading to the reference are as follows : The assessee has business of manufacturing oil engines, agricultural equipments and machine tools. The year of assessment is 1963 -64, for which the previous year ended on 31st June, 1962. During the accounting period relevant to the assessment year, the assessee incurred an expenditure, of Rs. 23,308 towards the foreign tour of its technical director one V. L. Doshi. According to the minutes of the meeting of the board of directors held on 22nd August, 1961, the said visit to Europe, the U.K. and the U.S.A. as also the Damascus was for further discussions with the company's existing collaborators and the proposed collaborators. The said tour included the programme of negotiation with Scottish Machine, i.e., the assessee's technical collaborators, for the manufacture of their planning machines at the assessee's machine tool division at Chinchwad; with Schiess Aktiengesellschaft, Dusseldorf, Germany, the assessee's technical collaborators for the manufacture of Vertical Turrent Lathes, and with Strojimport, Czechoslovakia, who were the assessee's collaborators for manufacture of Slotting Machines. The tour also included a visit to the Draper Corporation of U.S.A. to finalise a technical collaboration for the manufacture of their Automatic Looms in their factory at Satara Road. He was also further to discuss collaboration agreement for the manufacture of PFAUTER Gear Hobbing Machines at their machine tool division at Chinchwad. It also further appears that the said technical director was to attend the International Levant Trade Fair, Bari, Italy, and to visit the exhibition at Brussels and a fair at Damascus. In the application made to the Reserve Bank of India for the release of foreign exchange for the said tour, it was stated that the visit was primarily planned to study the modern development made in the manufacture of machine tools, diesel engines and precision tools with a view to incorporate the same in the machine tools and diesel engines manufactured by the assessee at Chinchwad and Satara Road factories; to finalise the purchase of machinery required for the expansion of the said two factories; to finalise the technical collaboration agreement with M/s. Draper Corporation, U.S.A.; to study the various technicalities connected with the manufacture of automatic looms; to discuss collaboration agreement for the manufacture of PFAUTER gear hobbing machines; to explore the possibilities of export market for the products of the assessee and to find our possibilities of entering into technical collaboration with the foreign firms for the manufacture of new items of machine tools in the newly built machine tool division of the assessee. The ITO was of the opinion that according to the said application made to the Reserve Bank, the technical director was also to study modern developments in the manufacture of various products of the company and explore the possibilities of export markets for them. There was, therefore, according to him, a clear emphasis on negotiation for technical collaboration and purchase of machinery in the said tour. He, therefore, attributed 2/3rds of the total expenditure, viz Rs. 15,536, to the said aspects of the tour and held that the said sum of Rs. 15,536 was in the nature of capital expenditure, and, therefore, liable to be disallowed from the expenses claimed for the relevant year.

(3.) THE assessee feeling aggrieved preferred an appeal to the AAC urging that the ITO had erred in disallowing the aforesaid two claims. The AAC held that it was admitted that no report was submitted by the said technical director to the assessee as to what exactly he had done during the said tour. There was also no evidence on record to show as to the activities carried out during the said tour. In the circumstances, he held that there was no need to interfere with the order of the ITO. As regards the payment of the sum of Rs. 16,029 made to M/s. G. Perry and Sons, the AAC held that it was rightly held that the substantial purpose of the agreement was for the erection of the pattern shop and plates and the introduction of new methods of manufacturing activities. He further held that the manner of the payment which was fixed under the agreement was in lump sum. This fact shows that the assessee had really purchased the capital asset in the form of 'know -how', they lay out of the shop and also valuable information relating to the purchase of machinery and plant. He, therefore, held that there was no need to interfere with the action taken by the ITO.