1966 (10) TMI 17 - HC - Income Tax

Appellant paid a certain sum to a company for providing know now - sum was properly disallowed as a capital expenditure

Summary

Issues Involved:

1. Whether the sum of Rs. 26,713 was properly disallowed as a capital expenditure.

Detailed Analysis:

1. Nature of Expenditure:
The primary issue was whether the expenditure of Rs. 26,713 incurred by the assessee, Mysore Kirloskar Limited, for acquiring "know-how" under a collaboration agreement with M/s. Alfred Herbert Ltd., was capital or revenue expenditure. The agreement involved transferring technical knowledge, manufacturing techniques, and other related information to the assessee for manufacturing specific types of lathes.

2. Agreement Terms:
Under the agreement, Herbert was to provide manufacturing techniques, detailed drawings, material specifications, and parts lists. Additionally, Herbert was to supply patterns, jigs, fixtures, and special tools at agreed prices, and an employee from Herbert was to supervise the assessee's factory. The machines manufactured were to be sold under the trademark "HERBERT KIRLOSKAR."

3. Clause 12 Analysis:
Clause 12 of the agreement was crucial, detailing the remuneration to Herbert for the "know-how" provided. It included an initial payment of pounds 1,000 for each type of machine and a 7.5% royalty on the invoice value of products sold. The payment structure indicated a lump sum for the technical knowledge and a running royalty for the use of patents and trademarks.

4. Tribunal's Findings:
The Income-tax Appellate Tribunal concluded that the expenditure was capital in nature. They reasoned that the object of the expenditure was to obtain technical "know-how" for manufacturing new types of lathes, which constituted a new line of business for the assessee. The Tribunal emphasized that the expenditure provided an enduring benefit, as the technical knowledge would be useful for 15 years and beyond, thus fitting the criteria of capital expenditure.

5. Supreme Court Precedents:
The judgment referenced the Supreme Court's decision in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, which distinguished between capital and revenue expenditure. The Court held that expenditure for acquiring an asset or advantage of enduring benefit is capital expenditure. This principle was reaffirmed in State of Madras v. G. J. Coelho.

6. Comparison with Other Cases:
The Court compared the present case with other rulings, notably the House of Lords decision in Rolls-Royce Ltd. v. Jeffrey (Inspector of Taxes), which recognized "know-how" as a capital asset. The Court also distinguished this case from Commissioner of Income-tax v. Ciba Pharma Private Ltd., where the technical "know-how" was deemed revenue expenditure due to its short-term nature and relevance to day-to-day business operations.

7. Final Decision:
The Court concluded that the "know-how" acquired by the assessee was a capital asset, as it was intended for manufacturing new types of machines and provided an enduring benefit. Consequently, the expenditure of Rs. 26,713 was correctly disallowed as capital expenditure.

Conclusion:
The High Court upheld the decision of the Income-tax authorities, affirming that the expenditure in question was capital in nature. The assessee was ordered to pay the costs of the reference, with an advocate's fee of Rs. 250.