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TMI Blog1989 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... nits of penicillin per milli-litre of the culture-medium. In the year 1963, with a view to increasing the yield of penicillin, the assessee negotiated with M/s. Meiji Seika Kaisha Ltd. ("Meiji" for short), reputed enterprise engaged in the manufacture of antibiotics in Japan, which agreed to supply to the assessee the requisite technical know-how so as to achieve substantially higher levels of performance or production-- of more than 10,000 units of penicillin per milli-litre of 'cultured-broth'-- with the aid of better technology and process of fermentation and with better yielding penicillin-strains developed by Meiji. The negotiations culminated in an agreement dated October 9, 1953, whereunder, Meiji, in consideration of the "once for all" payment of 50,000 U.S. dollars (then equivalent to Rs. 2,39,625) agreed to supply to the assessee the "sub-cultures of Meiji's most suitable penicillin-producing strains", the technical information, know-how and written description of Meiji's process for fermentation of penicillin along with a flow-sheet of the process on a pilot plant the design and specifications of the main equipment in such pilot plant arrange for the visits to and train ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Meiji's agreeing to supply the assessee with complete details of the technical know-how, the design, sub-cultures, flow sheet and written descriptions of the process once for all that the assessee paid to Meiji the stipulated sum of $ 50,000." ". . . It would thus appear that the payment was made for acquiring capital asset in the shape of technical know-how and other allied information. It was not made in the course of carrying out of an existing business of the assessee but was for the purpose of setting up a new plant and new process. It would, therefore, appear that the revenue authorities have rightly treated the payment as of capital nature." ". . . The process which the assessee took over from Meiji was not the same as it was working heretofore. In the present case, the outlay was 'incurred for a complete replacement of the equipment of the business inasmuch as a new process with a new type of Plant was to be put up in place of old process and old plant. (underlining supplied) At the instance of the assessee, the Tribunal stated a case and referred the following question of law for the opinion of the High Court: "Whether, the sum of Rs. 2,39,625 was a revenue expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement the assessee had obtained a new process and a new technical know-how from Meiji was not without evidence. Against the dismissal of I.T.A. No. 24 of 1971, by the High Court, the assessee has preferred Civil Appeal No. 44 of 1975. On February 24, 1987, this court, while directing the Tribunal to draw up a supplementary statement of the case and refer for the opinion of this court the further question of law which, according to the assessee, arose out of the Tribunal's order and which was the subject-matter of the assessee's appeal in Civil Appeal No. 44 of 1975, however, disposed of that appeal formally, leaving the question of law arising out of the supplemental reference to be considered in the present appeal, i.e., Civil Appeal No. 43 of 1975. The Tribunal has since submitted the supplementary statement of the case and has referred that question of law also. This is how both the questions of law are now before us. While in regard to the first question, the correctness of the opinion rendered by the High Court requires to be examined, the second question has to be answered for the first time as the reference is called by this court directly. We have heard Sri T. A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved. "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with view to produce the profits, it is a revenue expenditure." "The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." In Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 (SC), Lakshmiji Sugar Mills Co. Ltd. v. CIT [1971] 82 ITR 376 (SC) and in Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900 (SC), the enunciation made in Assam Bengal Cement Co.'s case [1955] 27 ITR 34, which in turn referred with approval to Lord Cave's dictum, was affirmed. In Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation [1938] 61 CLR 337, Dixon J, while indicating that the distinction between revenue and capital corresponds with the distinction between the "business entity, structure or organis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to liberate thought, they end often by enslaving it. The non-determinative quality, by itself, of any particular test is highlighted in B. P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia [1966] AC 224 (PC). Lord Pearce said (at p. 264) : "The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a common sense appreciation of all the guiding features which must provide the ultimate answer. . ." (emphasis supplied). The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions ; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Meiji were incidental to and for the effective exploitation of the high penicillin yielding strains of the culture to be supplied by Meiji. Learned counsel submitted that the whole range of the operations envisaged by the agreement pertained to the area of the "profit-earning process" and not the "profit earning machinery or apparatus". The cost relationship between what was involved in the improvisation of the process and the investment on the plant did, says counsel, indicate that the extant "profit-earning machinery" was not sought to be supplanted. Learned counsel also urged that there was no material for the Tribunal to hold that the use of new process and technology from Meiji amounted to a new venture not already in the line of the assessee's existing business or that it required the erection of a new plant discarding and supplanting the huge investment already existing. Learned counsel submitted that it was nobody's case that with the introduction of the Meiji process of fermentation with improved penicillin strains, the existing plant and machinery costing over Rs. 66 lakhs had become obsolete and irrelevant or that the assessee had to set up an altogether new plant to wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Some penicillins are obtained from direct fermentation and some others by a combination of fermentation and subsequent chemical manipulation of the fermentation product. The manufacturing process, it is Stated, consists Of four processes : Fermentation, isolation, chemical modification and finishing. Referring to the common basis of commercial production of penicillin in the New Encyclopaedia Britannica (Micropaedia, Vol. VII), it is mentioned: "penicillin, antibiotic, the discovery of which in 1928 by Sir Alexander Fleming marked the beginning of the antibiotic era. Fleming observed that colonies of Staphylococcus aureus (the pus-producing bacterium) failed to grow in those areas of a culture that had been accidentally contaminated by the green mould penicillium notatum. After isolating the mould, he found that it produced a substance capable of killing many of the common bacteria that infect human beings. This antibacterial substance, to which Fleming gave the name penicillin, was liberated into the fluid in which the mould was grown. This process is the basis of all commercial production of penicillin (p. 850) (emphasis supplied). In Encyclopaedia of Chemical Technology [Kir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to nonpartibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. In the present case, the principal reason that influenced the option of the High Court was that the initiation and exploitation of the new process brought in their wake a new venture requiring an altogether new plant. We are afraid this view may not be justified. Clauses 2, 4 and 6 of the agreement provide : "(2) For and in consideration of the sub-cultures, design, flow sheet and written description to be furnished by Meiji to ALEMBIC pursuant to paragraph (1) hereof, Alembic shall pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure. Reference may also be made to the observations of this court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692. There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose, of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down. In CIT v. Associated Cement Cornpanies Ltd. [1988] 172 ITR 257 (SC) at p. 262, this court said: "As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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