Commissioner
of Income-Tax, U.P., Lucknow. Vs. British India Corpn. Ltd., Kanpur [1987] INSC 31 (3
February 1987)
Mukharji,
Sabyasachi (J) Mukharji, Sabyasachi (J) Natrajan, S. (J)
CITATION:
1987 AIR 798 1987 SCR (2) 133 1987 SCC (2) 96 JT 1987 (1) 328 1987 SCALE (1)221
ACT:
Income
Tax Act, 1922--s.10(2)(XV)--Assessee Company Entering into agreement with
another company appointing its nominee as distributors of assessee's
products--In lieu of benefit of technical knowledge assessee paid to the
distributors for meeting initial expenses of establishment of
distributorship--Assessee claiming deduction-Payment whether capital
expenditure or revenue expenditure.
HEAD NOTE:
The
assessee-company entered into an agreement with M/s. Charles Walker and
Company, London which, inter alia, stipulated that
the latter would permit the use by the assessee of a number of registered trade
marks specified in the agreement and disclose to the approved officers of the
assessee the technique, practices and application of specialised tanning
processes. Paragraph 7 of the agreement provided that the assessee would
appoint Textile and General Supplies, nominee of the Charles Walker, as its
distributors for the sale of industrial leather manufactured by it in India and the assessee would pay
Rs.50,000 to the distributors for meeting the initial expenses of establishing
the distributorship. This agreement was to be in force for a period of seven
years. Simultaneously, another agreement was entered into between the assessee
and Textile and General Supplies for a period of seven years, but no reference
was made therein to the obligation of the assessee to pay Rs.50,000 to the
distributors.
For
the assessment year 1959-60 the assessee claimed the payment of Rs.50,000 to
Textile and General Supplies as a deduction permissible under s. 10(2)(XV) of
the Income Tax Act, 1922, which was rejected by the Income Tax Officer,
Appellate Assistant Commissioner and the Tribunal on the ground that the said
payment was in the nature of a capital expenditure.
In the
Reference, the High Court allowed the claim of the assessee holding that the
payment in question was a revenue expenditure.
Dismissing
the Appeal of the Revenue, 134
HELD:
1. The real question is whether the payment that had been made by the assessee
under the contract in question is a mere division of profits with another party
or is it a payment to the other party, the amount of which is ascertained by
reference to the profits. [138A-B]
2. No
test of Universal application can be laid down.
The
aim and object of the expenditure was one of the guiding factors. The aim and
object of incurring the expenditure in this case was the acquisition of the
know-how. Rs.50,000 was really part of the price paid by the assessee to obtain
the know-how. Pursuant to Paragraph 7 of the said agreement the assessee was
bound to appoint Textile and General Supplies, nominee of Charles Walker, as
its distributor for the sale of leather manufactured by it in India. Paragraph 7 was an integral part
of the agreement with Charles Walker and was a part of the consideration for
the receipt of the benefit. It was necessary condition of the agreement with
Charles Walker to appoint Textile and General Supplies as distributors of the
assessee. It was perhaps done to protect the technical know-how which Charles
Walker was parting so that the distributors would be a nominee of Charles
Walker. [138D; H; 139C-D]
3.
Having regard to the nature of the agreement and having regard to the facts
that the organisational set up under the distributorship agreement was to
endure for seven years and upon the expiry of the period, the assessee had no
relationship with the organisation and that the period of agreement between the
assessee and the distributors was contemporaneous with the agreement between
the assessee and Charles Walker under which the assessee became entitled to use
the registered trade marks, it must be considered to be a revenue expenditure,
because it,was part of the price for the acquisition of technical know-how and
the condition of appointment was a stipulation mentioned by Charles Walker.
[139D-F]
British Sugar Manufacturers, Ltd. v. Harris (Inspector of Taxes), 7 I.T.R. 101;
Countess Warwick Steampship Co. Ltd. v. Ogg, [1924] 2 K.B. 292 at 298; Assam
Bengal Cement Co. Ltd. v. Commissioner of Income-Tax, West Bengal, 27 I.T.R.
34; Commissioner of Income-Tax, Bombay City Iv. Ciba of India Ltd., (and vice
versa), 69 I.T.R. 692; Travancore Sugar and Chemicals Ltd. v. Commissioner of IncomeTax,
Kerala, 62 I.T.R. 566; Commissioner of Income-Tax, West Bengal H v. Coal
Shipments P. Ltd., 82 I.T.R. 902; Empire Jute Co. Ltd. v. Commissioner of
Income-Tax, 124 I.T.R. 1; L.H. Sugar Factory and Oil Mills (P) Ltd., v.
Commissioner of Income-Tax, U.P., 125 I.T.R. 293 and Commentry of Kanga and Palkhivala's
Income Tax, Seventh Edition, Volume 1 page 484 to 488, referred to.
135
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 1163 (NT) of 1974.
From
the Judgment and Order dated 25.11. 1971 of the Allahabad High Court in Income Tax Reference No. 310 of 1968 S.C. Manchanda,
M.N. Tandon and Miss A. Subhashini for the Appellant.
B.P.
Singh and Ranjit Kumar for the Respondent.
The
Judgment of the Court was delivered by SABYASACHI MUKHARJI, J. This is an
appeal from the judgment and order of the High Court of Allahabad dated 25th November, 1971.
The
Income-Tax Appellate Tribunal had referred to the High Court the following
question for its opinion:
"Whether,
on the facts and in the circumstances of the case, the expenditure of Rs.50,000
was a capital expenditure which could not be allowed as a deduction under
section 10(2)(xv) of the Income-tax Act, 1922?" The assessee carried on
the business of manufacture and sale of woolen goods, cotton textiles and hides
and leather products. The activity of tanning hides and manufacturing leather
products was carried on under the name and style of Cooper Allen and North West
Tannery branches. For the assessment year 1959-60, under the Income-tax Act,
the relevant accounting of which being the calender year ending on 31st December, 1958, the assessee had claimed a
deduction of Rs.50,000 paid to Messrs Textile & General Supplies Private
Ltd. Bombay (hereinafter referred to as
"Textile & General Supplies"). The assessee's claim was made on
the basis that the assessee was bound under an agreement with Messrs Charles
Walker & Co., London to pay that amount to Textile
General Supplies for meeting the initial expenditure for establishing it as
distributor of the assessee's products.
The
Income-tax Officer rejected the claim, and the Appellate Assistant Commissioner
upheld that decision. The assessee went up in appeal before the Income-tax
Appellate Tribunal.
The
Tribunal also rejected the claim of the assessee. At the instance of the 136
assessee, the Tribunal made a reference on the aforesaid question to the High
Court.
The
question is whether the assessee was entitled to claim deduction in the
computation of its profits and gains of business in respect of the expenditure
in question, not being in the nature of capital expenditure, laid out or
expended wholly or exclusively for the purpose of such business. In other
words, on the background of the facts in controversy in this case whether it
was revenue expenditure or capital expenditure.
This
question has been discussed in the various decisions. It is settled that the
question must be viewed from the practical point of view. There are deluge of
cases and no principle can be laid out with substantial accuracy which will be
applicable in all the cases. The answer to the question must depend on the
facts and circumstances of each case on the application of the principles of
law as laid down by the courts. The agreement in question in this case between
the assessee with Charles Walker stipulated that Charles Walker would permit
the use by the assessee of a number of registered trade marks specified in the
agreement and further disclose and make known to the approved officers of the
assessee the technique, practices and application of specialised tanning processes.
Besides providing for the provision of technical supervision by Charles Walker
and payment by way of salary, travelling expenses and maintenance to the
personnel sent out by it to India, the agreement also provided that in the
event of liberalisation of imports Charles Walker would limit its export to
India of certain products. The assessee undertook to pay to Charles Walker
technical fees calculated at 5% on the selling price of the products by the
processes disclose to it. Paragraph 7 of the agreement was to the following offect:
"The
Second participant (the assessee) agrees to appoint Textile and General
Supplies Private Ltd., Army and Navy Buildings, Mahatma Gandhi Road, Bombay-1,
India a nominee of the first participant (CharLes Walker) as distributors of
the second participant for the sate of industrial leather manufactured by the
second participant in India for the period of this agreement at a discount of
15% (fifteen per cent) on the prices at which Industrial Leather covered by
this agreement are sold to textile mills and other consumers. In addition the
second participant will pay Rs.50,000 (Rs. Fifty thousand only) to the
distributors for 137 meeting the initial expenses of establishing the distributoship
of the second participant on the express understanding that the first
participant will not part with his interest in Textile & General Supplies
Private Ltd. without the prior approval in writing of the second
participant." Seven years was the period of the agreement as agreed.
It is
clear from paragraph 7 as aforesaid read in the background of the entire facts
that the assessee was obliged to appoint Textile & General Supplies,
nominee of Charles Walker, as its distributors for the sale of industrial
leather manufactured by it in India. The assessee
was obliged by the aforesaid agreement to pay Rs.50,000 to the distributorship.
An
agreement was entered into by the assessee with Textile & General Supplies
in which after referring to the agreement with Charles Walkar it was stipulated
that the distributors would receive a discount of 15% of the sale price fixed
by the assessee and that the agreement would extend for the period of seven
years. Significantly, no reference was made to the obligation of the assessee
to pay Rs.50,000 to the distributors, a condition which was mentioned in the
agreement with Charles Walker alone. The obligation to pay Rs.50,000 to the
distributors was one of the conditions subject to which the assessee became
entitled to the use of the registered trade marks and to the disclosure of the
technical practices and application of the specialised processes to be supplied
by Charles Walker. This clause regarding appointment contained in paragraph 7
formed part and integral part of the agreement and was a consideration for the receipt
of the benefit from Charles Walker under the agreement.
It was
a condition to get the technical knowledge of the know-how that their nominee
should be appointed as distributor and for the setting up of the distributor's
business rupees fifty thousand was required to be paid. This was in essence an
integral part of the bargain for the acquisition of the technical knowledge to
have this particular distributor.
Numerous
decisions have dealt with this question. In British Sugar Manufacturers, Ltd.
v. Harris (Inspector of Taxes), 7 I.T.R. 101 the Court of Appeal in England
dealt with this question and Romer, L.J. at page 108 of the report observed in
dealing with the question which was similar to the present one that the real
question is, is the 138 payment that has to be made by the trader under the
contract in question a mere division of profits with another party or it is a
payment to the other party, the amount of which is ascertained by reference to
the profits? The Lord Justice observed that it was a difficult question. In
that case the Lord Justice held that the payment was made to earn the profit.
It was condition precedent to the acquisition of the know how that the payment
had to be made for installation of the set up of the distribution arrangement. Rowlatt,
J. in the case of Countess Warwick Steampship Co. Ltd. v. Ogg, [1924] 2 K.B.
292 at 298 observed that it is very difficult to lay down any general rule
which is both sufficiently accurate and sufficiently exhaustive to cover all or
even a great number of possible cases. Only broad tests could be laid down.
Some of such tests were laid down by this Court in Assam Bengal Cement Co. Ltd.
v. Commissioner of IncomeTax, West Bengal, 27 I.T.R. 34. This Court discussed
the broad principles at page 45 of the report. It is not necessary to reiterate
all these principles but one of the tests was that the aim and object of the
expenditure was one of the guiding factors. The aim and object of incurring the
expenditure in this case was the acquisition of the knowhow.
This
Court again in the case of Commissioner of IncomeTax, Bombay City Iv. Ciba of
India Ltd. (and vice versa), 69 I.T.R. 692 discussed the principles application
in determining whether the expenditure in such circumstances was a capital or a
revenue in nature. See also Travancore Sugar and Chemicals Ltd. v. Commissioner
of Income-Tax, Kerala, 62 I.T.R. 566; Commissioner of Income-Tax, West Bengal H
v. Coal Shipments P. Ltd., 82 I.T.R. 902; Empire Jute Co. Ltd. v. Commissioner
of Income-Tax, 124 I.T.R. 1. This Court observed what was material to consider
was the nature and the advantage in obtaining the asset in a commercial sense.
Also
see L.H. Sugar Factory and Oil Mills (P) Ltd. v. Commissioner of Income-Tax,
U.P., 125 I.T.R. 293.
These
principles have been summarised in the Commentary of Kanga and Palkhivala's
Income Tax, Seventh Edition, Volume 1 page 484 to 488. But the cases referred emphasise
that no test of universal application can be laid down.
The
question posed in this appeal has to be decided bearing the aforesaid
principles in mind. It is clear that Rs.50,000 was really part of the price
paid by the assessee to obtain the know-how. It is clear that pursuant to
paragraph 7, the assessee was bound to appoint Textile and General Supplies,
nominee of Charles Walker, as its distributor for the 139 sale of leather
manufactured by it in India. Contemporaneously, an agreement
was entered into by the assessee with Textile & General Supplies in which
after referring to the agreement with Charles Walker it was stipulated that the
distributors would receive a discount of 15% of the sale price fixed by the
assessee and that the agreement would extend for a period of seven years.
Significantly, no reference was made to the obligation of the assessee to pay
Rs.50,000 to the distributors, a condition which was in the agreement with
Charles Walker alone.
It is
clear that paragraph 7 referred to hereinbefore was an integral part of the
agreement with Charles Walker and was a part of the consideration for the
receipt of the benefit. It is ,not possible to find out the reasons which
persuaded Charles Walker to insist upon the appointment of Textile &
General Supplies as distributors of the assessee.
It was
a necessary condition of the agreement with Charles Walker. It was perhaps done
to protect the technical knowhow which Charles Walker was parting so that the
distributors would be a nominee of Charles Walker.
Having
regard to the nature of the agreement and having regard to the facts that the organisation
set up under the distributorship agreement was to endure for seven years and
upon the expiry of the period, the assessee had no relationship with the organisation
and that the period of agreement between the assessee and distributors was
contemporaneous with the agreement between the assessee and Charles Walker
under which the assessee became entitled to use the registered trade marks, it
must be considered to be a revenue expenditure. Considerable emphasis has been
laid by the revenue on the facts that in paragraph 7 of the agreement with
Charles Walker, it was mentioned that Rs. 50,000 would be paid to the
distributors for meeting the initial expenses. We are of the opinion that in
the facts and circumstances of the case, this was a revenue expenditure because
it was part of the price for the acquisition of technical know-how and the
condition of the appointment was a stipulation mentioned by Charles Walker. In
the premises we are of the opinion that the High Court was right in the view it
took.
The appeal
therefore fails and is accordingly dismissed with costs.
A.P.J.
Appeal dismissed.
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