1971 (11) TMI 36 - HC - Income Tax

Agreement for know-how, use of trade marks and advice - Whether, on the facts and circumstances of the case, the expenditure of Rs. 50,000 was a capital expenditure which could not be allowed as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922

Summary

Issues:
1. Whether the expenditure of Rs. 50,000 was a capital expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922?

Detailed Analysis:
The case involved the British India Corporation Ltd., Kanpur, claiming a deduction of Rs. 50,000 paid to Textile & General Supplies Private Ltd., Bombay, under an agreement with Charles Walker. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal all rejected the claim, leading to a reference to the High Court. The key issue was whether the expenditure was capital in nature under section 10(2)(xv) of the Income-tax Act, 1922.

The agreement with Charles Walker obligated the assessee to appoint Textile & General Supplies as distributors for industrial leather products and pay Rs. 50,000 for establishing the distributorship. Another agreement with Textile & General Supplies did not mention the payment obligation, indicating its link to the agreement with Charles Walker. The court emphasized that the payment was a condition for accessing trade marks and technical know-how from Charles Walker, constituting a revenue expenditure.

Referring to precedent cases, the court highlighted that payments for technical knowledge and experience necessary for business operations were considered revenue expenditures. The duration of the distributorship agreement aligned with the agreement with Charles Walker, indicating a temporary arrangement rather than an enduring benefit. Emphasis was placed on the purpose of the payment being a condition of the agreement with Charles Walker, supporting its characterization as a revenue expenditure.

Drawing parallels with previous judgments, the court concluded that the Rs. 50,000 expenditure should be treated as revenue expenditure under section 10(2)(xv) of the Income-tax Act, 1922. Therefore, the court answered the referred question in the negative, ruling in favor of the assessee and allowing the deduction. The assessee was awarded costs, and the decision highlighted the distinction between revenue and capital expenditures in the context of business agreements.