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Issues involved: Interpretation of deduction under section 37(1) of the Income-tax Act, 1961 for payment made to British Oxygen Co. Ltd., London.
Summary: The case involved a reference under section 256(2) of the Income-tax Act, 1961 regarding the deductibility of a payment made by an Indian company to the British Oxygen Co. Ltd., London. The Indian company, engaged in manufacturing and sale of various products, made a payment of Rs. 2,97,480 to the English company as per an agreement dated October 1, 1959. The dispute arose when the Income-tax Officer rejected the deduction claimed by the Indian company, which was later allowed by the Appellate Assistant Commissioner and upheld by the Tribunal citing the decision in Commissioner of Income-tax v. Ciba of India Ltd. [1968] 69 ITR 692. The main contention put forth by the revenue's counsel was that the expenditure should be treated as capital expenditure due to the enduring advantage obtained by the Indian company under the agreement. On the other hand, the assessee's counsel argued that the case was covered by the decision in Commissioner of Income-tax v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243 (Cal). Upon analyzing the clauses of the agreement, the court found that the Indian company did not acquire any permanent right to the information, processes, and inventions supplied by the English company. The agreement clearly stated that the Indian company was prohibited from using or disclosing the information after the termination of the agreement. Therefore, the court concluded that the expenditure incurred was a revenue expenditure for running the business and producing profits, not for creating an enduring asset. The court rejected the reliance on the Madras High Court decision ([1976] 102 ITR 665) as the circumstances of the present case were different. It was held that the case fell within the purview of the decision in Commissioner of Income-tax v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243 (Cal), where a similar agreement was interpreted as allowing for a revenue deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. In conclusion, the court answered the reference question in the affirmative and in favor of the assessee, with no order as to costs. Both judges concurred with the decision.
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