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TMI Blog1983 (12) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... who was the founder of the firm. The firm needed a component called " etched foils " for manufacture of capacitors by it. The assessee approached the Government of India for the grant of an import licence to it for importing etched foils. This application of the assessee was rejected and the assessee was required to etch the foils by themselves. The assessee approached the said A. C. Gupta to help it either in getting the import licence or to prepare etched foils indigenously. A. C. Gupta, in his letter dated December 20, 1968, wrote to the assessee stating that he was prepared to undertake the research provided the firm agreed to pay Rs. 20,000 to him to cover the cost of labour in the event of success and A. C. Gupta was to pass on the technique as developed by him to the assessee-firm. This offer of A. C. Gupta was accepted by B. Mohan, the partner of the assessee-firm. On behalf of the firm, he, in his letter, dated January 27,1969, offered to pay Rs. 20,000 to A. C. Gupta subject to two conditions, namely-(i) that in the event of the research of A. C. Gupta not leading to any positive result, the firm was not to be liable to pay any sum to him, and (ii) that the know-how deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Act. The Tribunal, however, rejected the assessee's contention in that regard as well and the disallowance of Rs. 20,000 as made by the authorities below was confirmed by it. The main contention of Shri C. S. Aggarwal, learned counsel for the assessee, is that the departmental authorities have thus come to the conclusion that the expenditure of Rs. 20,000 in question was incurred by the assessee towards the purchase of the technical know-how and it is also not disputed by them that this expenditure was incurred by the assessee wholly and exclusively for purposes of its business. It was contended that the disallowance of the claim by the ITO on the view that the expenditure in question was capital in nature is wholly erroneous and the expenditure in question was revenue expenditure. It was pointed out that the ITO in his assessment order simply observed that the expenditure in question was an expenditure of capital nature without giving any reason whatsoever for that view. The AAC did not at all consider the claim of the assessee under s. 37(1) of the Act and nor did the Tribunal, in fact, consider the claim of the assessee in that regard. It was submitted that the business of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the view that the expenditure in question was revenue expenditure and was not capital expenditure. Another important circumstance to be taken note of is that A. C. Gupta had no property right transferable in the technical know-how and had developed the technical know-how in question only as per the requirement of the assessee. No copyright was attached to the technical know-how in question and, as such, this was a case of a payment for obtaining certain knowledge and there was no property right of A. C. Gupta in the technical know-how which was transferred to the assessee. It is also worth mentioning here that the total taxable income of the assessee-firm for the assessment year in question was assessed at Rs. 97,994. The smallness of the payment of the sum of Rs. 20,000 having regard to the volume of the business of the assessee is also a slight circumstance to be taken into consideration in judging the nature of the expenditure in question. Coming to the case law cited at the Bar, the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, laid down the law on the point as under (headnote) : "(i) It is not a universally true proposition that what may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of the assessee, it must be regarded as an integral part of the profit-making process and in such a case the expenditure must be held to be a revenue expenditure. In that case one of the considerations that weighed with the Andhra Pradesh High Court in holding the expenditure in question as revenue expenditure was the fact that accessorises, designs and technical know-how with latest modifications which were sought to be transferred had no property right in them which was transferable. The court duly took note of the fact that the assessee was free to make use of the technical know-how after the expiry of the period of the agreement also. The court observed that there was no property right in the know-how which is transferable and the importing of special knowledge and technical know-how by the foreign collaborators to the assessee-company was just like a teacher selling his skill or knowledge to his pupil. This decision of the Andhra Pradesh High Court thus supports our view inasmuch as the expenditure in question was incurred by the assessee in the present case for the purchase of the technical know-how which was to be made use of and was used by the assessee for the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreements therein, which were for a period of 15 years, was to obtain the benefit of the technical assistance for running the business and therein the permission was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreements to other persons though outside India and the foreign companies had agreed to make their research and advantage available to the assessee. This is what the Calcutta High Court said on the point at issue in the case of CIT v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243 (headnote): " One of the primary rules for determining whether a particular expenditure is a revenue or capital expenditure is that the court, from the terms of the agreement between the parties and from the surrounding circumstances, has to ascertain the purpose for which it is being incurred. If the expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process, it should be held to be a revenue expenditure. Should, however, the purpose be the acquisition of an asset or a right of a permanent character the possession wher ..... X X X X Extracts X X X X X X X X Extracts X X X X
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