Commissioner of Income Tax, Bombay Vs.
Finlay Mills Ltd. [1951] INSC 42 (1 October 1951)
KANIA, HIRALAL J. (CJ) MAHAJAN, MEHR CHAND
AIYAR, N. CHANDRASEKHARA
CITATION: 1951 AIR 464 1952 SCR 11
CITATOR INFO :
F 1955 SC 89 (21) RF 1973 SC 318 (12)
ACT:
Indian Income-tax Act (XI of 1922), s. 10(2)
(xv)--Expenditure incurred for registration of trade mark--Whether business
expenditure-Effect of registration.
HEADNOTE:
The expenditure incurred by a company
carrying on the manufacture and sale of textile goods in registering for the
first time its trade marks which were not in use prior to the 25th January, 12
1937, is revenue expenditure and an allowable deduction under Sec. 10 (2) (xv)
of the Indian Income-tax Act. The fact that a trade marks after registration
could be separately assigned and not as a part of the goodwill of the business
only, does not make the expenditure for registration capital expenditure. It is
only an additional and incidental facility given to the owner of the trade
mark; it adds nothing to the trade mark itself.
Judgment of the Bombay High Court affirmed. Commissioner
of Income-tax, Bombay v. The Century Spinning and Weaving and Manufacturing Co.
Ltd. ([1947] 15 I.T.R. 105) approved. British Insulated and Helsby Cables Ltd.
v. Atherton ([1926] A.C. 205), Southern v. Borax Consolidated Ltd. ([1942] 10
I.T.R. Supp. 1), Henriksen v. Grafton Hotel Ltd. ([1942] 2 K.B. 184) referred
to.
CIVIL APPELATE JURISDICTION: Civil Appeal No.
103 of 1950.
Appeal from a Judgment of the Bombay High
Court (Chagla C.J. and Tendolkar J.) dated 25th March, 1949, in Income Tax
Reference No. 31 of 1948.
M. C. Setalvad, Attorney-General for India
(G. N. Joshi, with him) for the appellant.
R.J. Kolah, for the respondent.
1951. Oct. 1. The Judgment of the Court was
delivered by KANIA C.J.--This is an appeal from a judgment of the High Court at
Bombay and it arises out of the opinion expressed by the High Court in respect
of a question submitted to it by the Income-tax Tribunal. The material facts
are these. The respondent is a textile mills company carrying on the business
of manufacturing and selling textile goods. For the assessment years 1943-44
and '1944-45, covering the accounting periods ending with the calendar years
1941, 1942 and 1943, the respondent claimed the expenditure incurred by it in
registering for the first time its trade marks which were not in use prior to
the 25th February, 1937, as revenue expenditure and an allowable deduction out
of its income for the said periods, under section 10(2) (xv) of the Indian
Income tax Act. Following the decision of the Bombay High Court in Commissioner
of Income-tax, Bombay v. The Century Spinning 13 and Weaving and Manufacturing
Co. Ltd.(1), the Tribunal allowed the claim of the assessee. At the desire of
the appellant, the Tribunal submitted the following question for the opinion of
the High Court :"Whether, on the facts of the case, the expenditure
incurred by the assessee company in registering for the first time its trade
marks which were not in use prior to the 25th February, 1937, is revenue
expenditure and an allowable deduction under section 10(2) (xv) of the Indian
Income-tax Act ?" The High Court, following its previous decision and
finding that the fact of the trade marks having come into use after the 25th of
February, 1937, made no difference in the result, answered the question in the
affirmative. The Commissioner of Income-tax, Bombay, has come on appeal to us.
It was argued on behalf of the appellant that
the question whether a certain disbursement was of a capital or revenue nature,
has to be decided according to the principle laid down in British Insulated and
Helsby Cables Ltd. v. Atherton(2). In that case the company which carried on
the business of manufacturers of insulated cables established a pension fund
for its clerical and technical salaried staff.
The fund was constituted by a trust deed
which provided that members should contribute a percentage of their salaries to
the fund and that the company should contribute an amount equal to half the
contributions of the members; and further that the company should contribute a
sum of pound 31,784 to form the nucleus of the fund and to provide the amount
necessary in order that past years of service of the then existing staff should
rank for pension. That sum was arrived at by an actuarial calculation on the
basis that the sum would ultimately be exhausted when the object for which it
was paid was attained. The House of Lords held that this payment was in the
nature of capital expenditure and was therefore not an admissible deduction.
Although in the opinions expressed by the different members of the House of
Lords (1) [1917] 15 I.T.R. 105. (2) [1926] A.C. 205.
14 the line of approach is not completely the
same, the principle stated by Lord Cave in his speech has been test distinguish
capital expenditure from revenue expenditure. It was recognised that a sum of
money expended, not of necessity and with a view to a direct and immediate
benefit to the trade, but voluntarily and on the grounds of commercial
expediency, and in order indirectly to facilitate the carrying on of business,
may yet be expended wholly and exclusively for the purposes of the trade. The
Lord Chancellor observed that the question appeared to be a question of fact
which was proper to be decided by the Commissioners upon the evidence brought
before them in each case. The test that capital expenditure is a thing that is
going to be spent once and for all and income expenditure is a thing that is
going to recur every year was considered an useful element in arriving at the
decision but was not certainly the decisive fact. The Lord Chancellor observed
as follows:--"But when an expenditure is made, not only once and for all,
but with a view to bringing into existence an asset or an advantage for the
enduring benefit of the trade, I think that there is very good reason for
treating such an expenditure as properly attributable not to revenue but to
capital." In order to appreciate the true position here Correctly it is
next necessary to notice the relevant provisions of the Indian Trade Marks Act,
1940. It may be noted that before this Act there was no Trade Marks Act in
India but it was recognised that an action lay for infringement of a trade mark
independently of an action for passing off goods. The Act opens with the
preamble "whereas it is expedient to provide for the registration and more
effective protection of trade marks ...... "Section 2(1) of the Act
defines a trade mark as meaning "a mark used or proposed to be used in
relation to goods for the purpose of indicating or so as to indicate a
connection in the course of trade between the goods and some person having the
right to use the mark, whether with or without any indication of the identity
of that person." Section 14 permits the 15 proprietor of a trade mark to
have the trade mark registered. The Attorney-General, on behalf of the
appellant, relied on sections 20, 21, 28 and 29 in support of his contention.
He argued that before the Trade Marks Act, although the proprietor of a trade
mark could maintain an action for infringement of his trade mark and the cause
of action in such a case was quite different from the cause of action in an
action for passing off goods, by the Trade Marks Act the right of the owner of
the trade mark is increased by section 21, and it is made assignable independently
of the goodwill under sections 28 and 29 of the Trade Marks Act. The question
thus resolves itself into whether by reason of these two incidents the case
falls within the principle laid down by Lord Chancellor Cave, as mentioned
above.
In our opinion, the contention urged on
behalf of the appellant must fail. It is not contended that by the Trade Marks
Act a new asset has come into existence. It was contended that an advantage of
an enduring nature had come into existence. It was argued that just as machinery
may attain a higher value by an implementation causing greater productive
capacity, in the present case the trade mark which existed before the Trade
Marks Act acquired an advantage of an enduring nature by reason of the Trade
Marks Act and the fees paid for registration there under were in the nature of
capital expenditure. In our opinion, this analogy is fallacious. The machinery
which acquires a greater productive capacity by reason of its improvement by
the inclusion of some new invention naturally becomes a new and altered asset
by that process. So long as the machinery lasts, the improvement continues to
the advantage of the owner of the machinery. The replacement of a dilapidated
roof. by a more substantial roof stands on the same footing. The result however
of the Trade Marks Act is only two-fold. By registration, the owner is absolved
from the obligation to prove his ownership of the trade mark. It is treated as
prima facie proved on production of the registration certificate.
It thus merely saves him the trouble of
leading evidence, in the event of a suit, in a court 16 of law, to prove his
title to the trade mark. It has been said that registration is in the nature of
collateral security furnishing the trader with a cheaper and more direct remedy
against infringers, Cancel the registration and he has still his right
enforceable at common law to restrain the piracy of his trade mark. In our
opinion, 'this is neither such an asset nor an advantage as to make payment for
its registration a capital expenditure. In this connection it may be useful to
notice that expenditure incurred by a company in defending title to property is
not considered expense of a capital nature. In Southern (H. M. Inspector of
Taxes) v. Borax Consolidated Limited(1). it is there stated that where a sum of
money is laid out for the acquisition or the improvement of a fixed capital
asset it is attributable to capital, but if no alteration is made in the fixed
capital asset by the payment, then it is properly attributable to revenue,
being in substance a matter of maintenance, the maintenance of the capital
structure or the capital asset of the company. In our opinion, the advantage
derived by the owner of the trade mark by registration falls within this class
of expenditure. The fact that a trade mark after registration could be
separately assigned, and not as a part of the goodwill of the business only,
does not also make the expenditure for registration a capital expenditure. That
is only an additional and incidental facility given to the owner of the trade
mark. It adds nothing to the trade mark itself.
In the judgment of the High Court some
emphasis is laid on the fact that by reason of registration the duration of the
trade mark is only for seven years, and it does not thus possess that
permanency which is ordinarily required of an expenditure to make it a capital
expenditure and in order to prove the existence of a benefit of an enduring
character.
The learned Attorney-General contended that
the view that as the benefit of registration lasted for seven years, i.e., for
a limited period, it prevented the expenses of registration being treated as
capital expenditure, is unsound (1) [1942] 10 I.T.R. Suppl. 1.
17 and for that contention he relied on
Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd.(1). In that case, tenants
of licensing premises by agreement with the landlord paid by instalment the
monopoly value fixed by the licensing justices when granting the licence under
section 14 of the Licensing (Consolidation) Act, 1910. These were sought to be
deducted as revenue expenditure but were disallowed by the Court. Lord Greene
M.R. first considered that the payment fell into the same class as the payment
of a premium on the grant of a lease or the expenditure on improvements to the
property which justices may require to be made as a condition of granting a
licence. Having reached that conclusion he rejected the argument that the
payment not being made in one lump sum but by installments made a difference in
the character of the payment. He observed as follows :--"Whenever a
licence is granted for a term, the payment is made as on a purchase of a
monopoly for that term. When a licence is granted for a subsequent term, the
monopoly value must be paid in respect of that term and so on. The payments are
recurrent if the licence is renewed, they are not periodical so as to give them
the quality of payments which ought to be debited to revenue account. The thing
that is paid for is of a permanent quality although its permanence, being
conditioned by the length of the term, is short lived.
A payment of this character appears to me to
fall into the same class as the payment of a premium on the grant of a lease,
which is admittedly not deductible." The Attorney General relied on these
observations to point out that the permanence of the advantage was thus not
dependent on the number of years for which it was to enure for the benefit of
the proprietor of the trade mark. In our opinion, these observations have to be
read in the context in which they have been made. The learned Master of the
Rolls was discussing only the question of payment being made by installments as
not making any difference in the nature of the (1) [1942] 2 K.B. 184. expenditure.
It was first held by him that the payment in question was of a capital nature
and of the same character as premium paid on the grant of a lease and was
therefore necessarily of a capital nature. Having come to that conclusion, he
only rejected the contention that because the premium was paid in more installments
than one it lost its character a capital expenditure. In our opinion, this is
an entirely different thing from stating that the fact of the advantage being
for a limited time altered the character of the payment in any way. As observed
by Viscount Cave L.C. the question is always one of fact depending on the
circumstances of each case individually.
In our opinion, the decision of the High
Court reported in Commissioner of Income-tax, Bombay v. The Century Spinning
and Weaving and Manufacturing Co. Ltd.(1) is correct and in the present case
also the contention of the appellant must fail. The appeal therefore fails and
is dismissed with costs.
Appeal dismissed.
Agent for the appellant: P.A. Mehta.
Agent for the respondent: R.A. Govind.
(1) [1947] 15 I.T.R. 105.
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