Full Judgment Text
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PETITIONER:
THE EIMCO K.C.P. LTD., MADRAS
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, MADRAS
DATE OF JUDGMENT: 15/02/2000
BENCH:
D.P.Wadhwa, S.S.M.Quadri
JUDGMENT:
SYED SHAH MOHAMMED QUADRI,J.
The judgment and order passed by the Division Bench of
the High Court of Madras in T.C.Nos.1224 and 1225 of 1977
dated January 17, 1983 is subject-matter of challenge in
these appeals. The appellant-assessee is a company
registered under the Indian Companies Act. It was
incorporated in the year 1965. Two companies M/s.Eimco
Corporation Inc. (for short Eimco), an American company,
and M/s. K.C.P.Ltd. (for short KCP), an Indian Company,
promoted the appellant company. The authorised capital of
the appellant was Rs.10,000,000 consisting of 1,000,000
equity shares of Rs.10/- each. Each of them agreed to
subscribe Rs.4,70,000/- out of which each will have to pay
initially a sum of Rs.2,80,000/- towards its contribution.
Towards its share Eimco contributed technical know-how
consisting of right and license to manufacture existing
Eimco Sedimentation and filtration equipment, along with the
supply of and/or the agreement to supply general technical
data including manufacturing drawings in the form as used
and possessed by Eimco, relating to the sales, application,
selection, material requirements, manufacture, installation
and operation of such equipment, including but not limited
to test procedures, instruction manuals, technical manuals,
general arrangement and detail drawings, flow charts,
research and development reports, sales manuals and
bulletins, operating reports on existing installations and
installation and operation manuals. It valued the know-how
etc. at a sum of Rs.2,35,000/- and paid the balance in cash
as its contribution. The Board of Directors of the
appellant allotted equity shares of Rs.2,35,000/-, being of
the value of the know-how, to Eimco by resolution passed on
April 29, 1968. In the assessment year 1969-70, the
appellant claimed deduction of Rs.2,35,000/- as revenue
expenditure paid to Eimco towards consideration for supply
of technical know-how by it. By order dated March 25, 1970,
the Income Tax Officer treated that as a capital expenditure
and allowed 1/14th of the said amount as allowable
expenditure under Section 35-A of the Income Tax Act (for
short the Act). The appellant challenged that order
before the Appellate Assistant Commissioner on the ground
that the whole expenditure ought to have been allowed as
revenue expenditure. While so, the Commissioner of Income
Tax in exercise of its power under Section 263(1) of the Act
revised the said order of the Income Tax Officer dated March
25, 1970 holding that the amount in question could not be
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treated as expenditure and that granting 1/14th of the said
amount as capital expenditure under Section 35-A was
erroneous and prejudicial to the interest of the revenue and
thus set aside the same. Thereafter, the Appellate
Assistant Commissioner dismissed the appeal and directed
that 1/14th amount be added back as income of the assessee.
Against both the orders, the appellant filed appeals before
the Income-tax Appellate Tribunal. The Tribunal, on
December 12, 1975, allowed appeals of the appellant taking
the view that the said amount was revenue expenditure of the
appellant. At the instance of the Revenue, the following
two questions were referred to the High Court under Section
256(1) of the Act : (1) Whether on the facts and in the
circumstances of the case, the Commissioner could interfere,
acting under Section 263 of the Income-tax Act, 1961 with
the order of the Income-tax Officer on a point which was
directly in appeal before the Appellate Assistant
Commissioner?
(2) Whether on the facts and in the circumstances of
the case, the sum of Rs.2,35,000/- paid by the assessee
company to the foreign collaborator constitute revenue
expenditure?
Both the questions were answered in favour of the
Revenue and against the assessee by the High Court in the
impugned order. Mr.M.Uttam Reddy, learned counsel appearing
for the appellant, did not seriously canvass the correctness
of the impugned order in regard to the first question and in
our view rightly. Having regard to Section 263 of the
Income Tax Act and the decision of this Court in
Commissioner of Income-tax, Bombay Vs. Amritlal Bhogilal &
Co. [34 ITR 130] and judgments of High Courts of Assam in
Ramlal Onkarmal Vs. Commissioner of Income-tax, Assam [44
ITR 578] and of Kerala in Kelpunj Enterprises Vs.
Commissioner of Income-tax, Kerala [108 ITR 294], which we
approve, we confirm the answer to the first question
recorded by the High Court. Regarding the second question
Mr. Reddy vehemently contended that the amount of
Rs.2,35,000/- was paid by the appellant to the foreign
collaborator to acquire the know-how so it was revenue
expenditure and ought to have been so held by the High
Court. Mr. Shukla argued that know-how etc. were
contributed by Eimco towards its share of the capital and
that no amount was paid by the appellant to Eimco;
allotment of shares to Eimco by the appellant could not be
treated as expenditure incurred by it for purchase of
know-how.
To appreciate the contention of Mr.Reddy, it may be
necessary to quote Section 37(1) of the Income Tax Act here
: 37. General. -(1). Any expenditure (not being
expenditure of the nature described in Sections 30 to 36
* and not being in the nature of capital expenditure or
personal expenses of the assessee), laid out or expended
wholly and exclusively for the purposes of the business or
profession shall be allowed in computing the income
chargeable under the head Profits and gains of business or
profession.
A plain reading of the above provision makes it clear
that it is a residuary provision and allows an expenditure,
not covered under Sections 30 to 36, in computing the income
chargeable under head profits and gains of business or
profession, on fulfilment of the other requirements,
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namely, (i) the expenditure should not be in the nature of
capital expenditure or personal expenses of the assessee;
(ii) it should have been laid out or expended wholly and
exclusively for the purposes of the business or profession;
(iii) it should have been expended in the previous year.
The question is whether the amount in question can be
treated as expenditure and whether it was expended wholly
and exclusively for the purpose of the business of the
appellant. In support of his contention that Rs.2,35,000
were spent for purchase of technical know-how, so it is a
revenue expenditure, Mr.Reddy relied upon a letter addressed
by the Vice-President of the Eimco Corporation to the
Director of K.C.P.Ltd. on April 14, 1965. The relevant
excerpts of the said letter read as under : In general, we
agree that the organisation will follow that set forth in
the Memorandum and Articles of Association of the K.C.P.-
Fives Lille - Cail Private Limited (a corporation of India),
but with the following specific provisions to which we have
agreed.
1. The Company will be organised and headquartered in
India as an Indian Corporation with broad corporate powers.
2. The name of the company will be EIMCO-K.C.P.
Private Ltd.
3. There will be two subscribers for one share each
each partner will designate one subscriber.
4. Authorised capital is to be Rs.10,000,000
consisting of 1,000,000 equity shares of Rs.10 each.
5. Each partner will subscribe to Rs.470,000; of
this amount each will initially pay in Rs.280,000 or
equivalent after approval by the Government of India and
before commencement of operation; and the balance of the
amount subscribed will be contributed by each partner, in
equal amounts, as and if required for operation of the
business.
6. The amount initially paid in by Eimco will
primarily consist of Eimcos know-how, valued at Rs.235,000
and cash. Know-how consists of the right and license to
manufacture existing Eimco Sedimentation and filtration
equipment, along with the supply of and/or the agreement to
supply general technical data including manufacturing
drawings in the form as used and possessed by Eimco,
relating to the sales, application, selection, material
requirements, manufacture, installation and operation of
such equipment, including but not limited to test
procedures, instruction manuals, technical manuals, general
arrangement and detail drawings, flow charts, research and
development reports, sales manuals and bulletins, operating
reports on existing installations and installation and
operation manuals. The balance of the initial investment
will be in cash.
A plain reading of the letter indicates that Eimco and
K.C.P agreed to float the appellant company with authorised
capital of Rs.10,000,000 consisting of 1,000,000 equity
shares of Rs.10/- each. Each of them agreed to subscribe
Rs.4,70,000 out of which the amount equivalent to
Rs.2,80,000 was to be paid (after approval by the Government
of India and before the commencement of operation). Eimco
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valued the know- how etc. at a sum of Rs.2,35,000/- and
paid the balance in cash towards its contribution. What in
effect was done by the appellant in allotting equity shares
of Rs.2,80,000 to Eimco, was to reimburse the contribution
of Eimco by way of know-how, which can never be treated as
expenditure much less an expenditure laid out wholly and
exclusively for purposes of the business of the appellant.
It is not a case where after the incorporation, the
appellant-company in the course of the carrying on its
business, spent the said amount for acquiring any asset.
Reliance by Mr.Reddy on the judgment of this Court in
Alembic Chemical Works Co.Ltd. vs. Commissioner of
Income-Tax, Gujarat [(1989) 177 ITR 377] is wholly
inappropriate. There know-how was acquired to produce
higher yield and sub-culture of high yielding strain of
penicillin. The assessee- company was already engaged in
manufacture of antibiotics including penicillin before it
acquired the know-how. Therefore, it was a case of a
running company acquiring know-how to increase its yield and
quality of its product and for the better conduct and
improvement of the existing business and therefore the
amount spent on acquiring know-how was held to be revenue
expenditure. In our view, the High Court has rightly
concluded that allotment of equity share by the appellant to
Eimco, in the circumstance of the case, cannot be termed as
expenditure much less revenue expenditure and rightly
answered the question referred to it against the
appellant-assessee. We find no merit in these appeals which
are accordingly dismissed with costs.