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Issues Involved:
1. Whether the payment made by the assessee to Ciba Basle Ltd. in pursuance of the agreement dated December 17, 1947, is an admissible deduction under section 10(2)(xii) or section 10(2)(xv) of the Indian Income-tax Act. 2. Whether the payment made in accordance with the terms of the agreements dated November 15, 1944, and June 18, 1948, for meeting the expenses of Suit No. 890 of 1946 is an allowable expense under section 10(2)(xv) of the Income-tax Act. Issue-wise Detailed Analysis: Issue 1: Admissibility of Deduction under Section 10(2)(xii) or 10(2)(xv) Facts: - The assessee, Ciba Pharma, an Indian subsidiary of Ciba Basle, entered into an agreement on December 17, 1947, with Ciba Basle for technical consultancy, research contributions, and use of patents and trademarks. - Payments made under this agreement were claimed as deductions under section 10(2)(xii) and alternatively under section 10(2)(xv) of the Indian Income-tax Act. - The Income-tax Officer disallowed the claim, considering it capital expenditure. The Appellate Assistant Commissioner upheld this view. However, the Tribunal allowed the claim under section 10(2)(xii) and alternatively under section 10(2)(xv). Judgment: - Section 10(2)(xii) allows deductions for expenditure on scientific research related to the business. The court found that the research conducted by Ciba Basle was for its own business and not on behalf of Ciba Pharma. Hence, the payment made by Ciba Pharma was not an expenditure on scientific research as per section 10(2)(xii). - The court held that the payment made for technical know-how and use of patents and trademarks is not capital expenditure but a revenue expenditure. The payment did not result in acquiring any asset of enduring benefit but was made to run the business and earn profits during the agreement period. - Therefore, the payment is an allowable deduction under section 10(2)(xv) as it was laid out wholly and exclusively for the purpose of the business. Conclusion: The payment made by the assessee to Ciba Basle in pursuance of the agreement dated December 17, 1947, is not an admissible deduction under section 10(2)(xii) but is an allowable deduction under section 10(2)(xv). Issue 2: Allowability of Litigation Expenses Facts: - Ciba Pharma claimed deductions for litigation expenses incurred by May & Baker in a suit against Boots Pure Drug Co. Ltd. for patent infringement, as per agreements dated November 15, 1944, and June 18, 1948. - The Income-tax Officer disallowed the claim, stating that the suit was instituted before Ciba Pharma came into existence and that the liability was not transferred to Ciba Pharma. - The Tribunal allowed the claim, stating that Ciba Pharma took over the pharmaceutical section's business and the liability arose in the course of carrying on its business. Judgment: - The court found that there was no evidence that the liability of Ciba Basle under the agreement of November 15, 1944, was transferred to Ciba India Ltd. or Ciba Dyes Ltd. before being taken over by Ciba Pharma. - Clause 3 of the agreement of June 18, 1948, only transferred liabilities of Ciba (India) Ltd. to Ciba Pharma, and there was no clause in the agreement of December 17, 1947, transferring the litigation expense liability to Ciba Pharma. - Therefore, Ciba Pharma is not entitled to claim the litigation expenses as a deduction under section 10(2)(xv). Conclusion: The payment made in accordance with the terms of the agreements dated November 15, 1944, and June 18, 1948, for meeting the expenses of Suit No. 890 of 1946 is not an allowable expense under section 10(2)(xv). Final Decision: 1. The payment made by the assessee to Ciba Basle in pursuance of the agreement dated December 17, 1947, is an admissible deduction under section 10(2)(xv) but not under section 10(2)(xii). 2. The payment made for meeting the expenses of Suit No. 890 of 1946 is not an allowable expense under section 10(2)(xv).
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