1976 (2) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure on drawings, designs, and patterns was allowable as revenue expenditure.
2. Whether the expenditure on presents to the sales manager and other officials was allowable under section 37 of the Income-tax Act, 1961.
3. Whether the expenditure paid to Hayeka Engineering A.G. Zurich for expert opinion was allowable.

Detailed Analysis:

Issue 1: Expenditure on Drawings, Designs, and Patterns
Common Question in Both References:
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that one-fifth of the expenditure incurred by the assessee for purchase of drawings, designs, and patterns from the foreign concern under the agreements for manufacture of certain machinery was allowable as revenue expenditure?"

Facts:
- The assessee, a public limited company, engaged in manufacturing diesel engines, compressors, pumps, and blowers, entered into three agreements with Swiss Locomotive and Machine Works (S.L.M.) for the manufacture of rotary air-compressors, rotary blowers and water-ring pumps, and vertical diesel engines.
- The agreements included the provision of copiable workshop drawings, manufacturing instructions, etc., for which the assessee paid a "selling price."
- The Income-tax Officer and the Appellate Assistant Commissioner initially treated this expenditure as capital expenditure, but the Tribunal held it as revenue expenditure.

Judgment:
- The Tribunal, after examining various decisions, concluded that the payments were for a license and not for the acquisition of a capital asset, as the right of S.L.M. had not diminished.
- The High Court, referencing the Elecon Engineering Co. Ltd. case, held that the expenditure on workshop drawings, manufacturing instructions, etc., was for the purpose of exploiting the license agreement and not for acquiring a capital asset.
- The Court noted that the expenditure was for obtaining an advantage to run the business and earn profits, not for acquiring ownership of the designs and drawings.
- The Court concluded that the expenditure was revenue in nature and allowable under section 37 of the Income-tax Act, 1961.

Conclusion:
The expenditure on drawings, designs, and patterns was allowable as revenue expenditure.

Issue 2: Expenditure on Presents to Sales Manager and Officials
Question in Income-tax Reference No. 125 of 1974:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the expenditure of Rs. 2,125 incurred by way of presents to the sales manager and other officials of its collaborators by holding that the same did not satisfy the test laid down for allowance of the claim under section 37 of the Income-tax Act, 1961?"

Facts:
- The assessee incurred Rs. 2,125 on presents to the sales manager and other officials of S.L.M.
- The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal disallowed this expenditure, stating it was not incurred wholly and exclusively for business purposes.

Judgment:
- The High Court observed that maintaining good relations with foreign collaborators was essential for the smooth functioning of the assessee's business.
- The Court held that the expenditure was incurred to establish goodwill and facilitate business operations, thus satisfying the requirements of section 37 of the Income-tax Act, 1961.
- The expenditure was not capital or personal in nature and was wholly and exclusively for business purposes.

Conclusion:
The expenditure on presents to the sales manager and other officials was allowable under section 37 of the Income-tax Act, 1961.

Issue 3: Expenditure Paid to Hayeka Engineering A.G. Zurich
Question in Income-tax Reference No. 181 of 1974:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing expenditure of Rs. 10,965 paid to Hayeka Engineering A. G. Zurich for getting their expert opinion?"

Facts:
- The assessee paid Rs. 10,965 to Hayeka Engineering for expert opinion on erecting a foundry.
- The foundry was not started during the relevant year, and the expenditure was considered not related to the existing business.
- The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal disallowed the expenditure, stating it was not incurred in the course of the running business and was capital in nature.

Judgment:
- The High Court noted that the expenditure was for obtaining expert opinion as preliminary expenditure before establishing a foundry, which was a capital asset.
- The Court held that the expenditure was capital in nature, irrespective of whether the foundry was established as per the expert's opinion.
- The expenditure was not deductible under section 37 of the Income-tax Act, 1961, as it was incurred for acquiring a capital asset.

Conclusion:
The expenditure paid to Hayeka Engineering A.G. Zurich was not allowable as it was capital in nature.

Final Answers:
1. The expenditure on drawings, designs, and patterns was allowable as revenue expenditure.
2. The expenditure on presents to the sales manager and other officials was allowable under section 37 of the Income-tax Act, 1961.
3. The expenditure paid to Hayeka Engineering A.G. Zurich was not allowable as it was capital in nature.