HYLAM LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee a consolidated reference under Section 256(1) of the Income-tax Act, 1961, for the four assessment years 1963-64 to 1966-67 has been made to this court by the Income-tax Appellate Tribunal, Hyderabad, on the following questions of law :

(2.) THE material facts are: THE assessee is a public limited company, carrying on business of manufacture of laminated materials, resins and moulding powders. Bakelite Company, London, was the proprietor of Indian Letter Patent Nos. 57094, 57095 and 57459 for the production of copper-clad laminates. For the purposes of manufacture of copper-clad laminates, patents of which were owned by the Bakelite Company Ltd., London, the assessee-company entered into an agreement on December 7, 1959, with Bakelite Company Ltd., London (hereinafter called the " English company"). By that agreement, the English company granted to the assessee an exclusive non-assignable licence to make use, exercise and vend laminates in accordance with processes covered by the Letter Patent Nos. 57094, 57095 and 57459. THE licence granted to the assessee-company was to continue for the unexpired term of those Indian Letter Patent and any extension or regrant thereof. As a consideration for the grant, the assessee agreed to pay 5% royalty on the net selling price of all laminated products made and sold by it in accordance with those patented processes. When the total of the royalty payments reached 5,000 the assessee was no more liable to pay the royalty. This agreement was entered into by the assessee with the English company pursuant to Clause (5) of the agreement dated February 1, 1949, which was already entered into by and between them. Under Clause 5(a) of the agreement dated February 1, 1949, the assessee-company agreed to pay a sum equal to 1/3 of the costs and expenses incurred by the English company in developing new laminated products, if at any time, at the request of the assessee, the English company supplied to it information regarding production of the new laminated products. In pursuance of the agreement dated December 7, 1959, the assessee-company paid the following amounts of royalty to the English company and claimed deduction of those amounts in the computation of its total income for the respective assessment years:

(3.) THE Income-tax Officer disallowed the claim of the assessee for the deduction of the aforesaid amounts paid as royalty and as consultancy fees, on the ground that they were of the nature of capital expenditure. THE Income-tax Officer observed in the assessment order for 1963-64, that;