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TMI Blog1982 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... l, 1973, the Tribunal was right in disallowing the claim under the provisions of the Income-tax Act, 1961 ? " So, far as the second question is concerned, which is at the instance of the Revenue, it must, in view of the decision of this court in the case of People's Engineering Motor Works Ltd. v. CIT [1981] 130 ITR 174, be answered in the affirmative and in favour of the Revenue. We must, however, make it quite clear that in the previous decision, referred to hereinbefore, this court was concerned with a case where a provision for gratuity had been made. In the premises, this answer would not affect the consideration of any case where no provision has been made at all. We must now deal with the first question, which is at the instance of the assessee. In order to appreciate the said question, it would be necessary to refer to certain facts in the sense that in the assessment order for the relevant assessment year, the ITO disallowed Rs. 66,666 with reference to technical consultation by the assessee with Kaiser Aluminium Technical Services Inc. The assessee being aggrieved went up in appeal. The assessee relied upon the decision of the Tribunal for the earlier years. The dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the AAC. The assessee company was incorporated on 13 the December, 1951, and it obtained certificate of commencement of business on 15th March, 1958. The factory at Renukoot, in the district of Mirzapur, U.P., was erected in 1960 and the actual manufacturing operation started on and from 14th May, 1962. After incorporation of the company and before commencement of the manufacturing operation, the company had entered into agreements with four different consulting organisations of U.S.A. as mentioned below: 1 . Agreement dated 1st January, 1960, with Henry J. Kaiser Co. 2. Kaiser Aluminium Technical Services Inc. 3. Kaiser Aluminium Chemical Corporation, and 4. Kaiser Engineers Overseas Corporation. We are mainly concerned with the second agreement. The assessee has capitalised the expenditure incurred in respect of the agreements mentioned in 1, 3 4 on the ground that these expenses were directly related to the setting up of the projects or the factory at Renukoot up to the pre-production stage. We are not concerned with those agreements or with the expenditure incurred by the assessee-company under those agreements. The agreement which is relevant is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If KAISER believes that a particular employee is not qualified or otherwise suited to receive such training, it may advice HINDUSTAN and an alternate will be selected by HINDUSTAN in lieu of such employee. (c) KAISER shall make available to HINDUSTAN in the Union of India the services of qualified engineers and other technicians in such reasonable number as may be mutually agreed to be necessary and at such remuneration and on such terms as may be mutually agreed to advise the personnel of HINDUSTAN in the operation of the aluminium plant (and the matters and things as described in section I above) in accordance with good industry practice as adapted to local conditions. (d) Technical advice and information shall be such as is available to KAISER or its affiliated companies and shall be sufficient in scope to enable competent engineering, manufacturing and metallurgical personnel to under stand and apply the subject-matter and evaluate the desirability of using the same, but detailed engineering services need not be furnished and KAISER shall not be under any obligation to undertake for HINDUSTAN any research under the provisions of this agreement. Such detailed engineering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prohibited or prevented from disclosing technical advice now available to them which is essential to said plants. Except with respect to the licence of existing patents of KAISER relating to the alumina process and the aluminium reduction process, KAISER makes no representation or warranty that the use of any technical information or advice or patent licence now or hereafter disclosed or granted, as the case may be, can be used without patent infringement. 11. In consideration of the premises and in addition to the reimbursement of expenses as hereinbefore provided HINDUSTAN shall immediately on the execution of these presents allot and issue to KAISER 120 thousand (1,20,000) shares of its Rs. 10 per value out of its equity share capital credited as fully paid up." Clause 15 of the said agreement was as follows: " 15. This agreement shall become effective on the date first above set forth and shall continue in force for a period of twenty (20) years. " As mentioned hereinbefore, on behalf of the Revenue two main contentions were urged before the Tribunal and those were repeated before us, viz., that by entering into the agreement in question in respect of which the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfers and assigns to Hindustan as a contribution of capital in kind the know-how property, with the full and exclusive right and liberty to use the same within the Union of India, subject to the obligation to maintain the same in confidence, as provided in section 3 hereof. The know-how property shall be delivered within the United States of America to Hindustan or, at its request, to its designated representative. " Clause 2 of the agreement states that in consideration of the transfer and assignment to the assessee of the know-how property the assessee should allot and issue to Kaiser 4,80,000 shares of Rs. 10 per value of the equity share capital of the assessee credited as fully paid up. Clause 4 of the said agreement is as follows: "Kaiser retains said know-how property and all rights and interests therein, except in the Union of India, and reserves the right to sell and dispose of the know-how property to others except in the Union of India, provided that when KAISER sells or disposes to any such others the know-how property as aforesaid it shall make it a condition of the sale or disposal that the said know-how property shall not be used or available for use, sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general corporate expenses of Kaiser Overseas actual salaries and remuneration paid to corporate officers except for such period or periods of time as such officer or officers may be assigned full time to the project. This article also contained that 'Fee shall be paid to Kaiser Overseas out of the fund provided in XXV, clause 6 hereof ' and that the payment of the fee shall be made in 21 monthly instalments of $9,000 each commencing on the first day of the month following execution of this contract and the remaining $10,000 shall be paid 60 days after the completion of the project." As mentioned hereinbefore it is necessary to understand and appreciate that all the agreements should be considered together to understand the entirety of the purpose of the expenditure incurred by the assessee. Having taken into consideration these different clauses we have to consider whether the expenditure with which we are concerned was capital or revenue. It is well settled that any expenditure to be properly charged for the year in question in computing for that year that kind of expenditure was necessary for carrying on the business activity of the assessee in that particular year. If that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it was capital expenditure or revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test was of no avail that one might go to, the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business. The Supreme Court also reiterated at p. 46 of the report that a lump sum payment could as well be made for liquidating certain recurring claims which are clearly of a revenue nature. Therefore, the true test must be to find out the principles for which the expenditure was made or incurred or liability for the same was incurred and the nature of the expenditure. We must find out from the entirety of the circumstances in the background of the other factors whether the expenditure was referable to the day to day operation or running of a business. In this case it is admittedly not a pre-production expenditure. It is also clear that though the expenditure was made initially, altog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure, in our opinion, cannot be considered to be at par with the nature of the expenditure sought to be deducted in the case before the Judicial Committee. As we have mentioned before, in the Assam Bengal Cement Co. Ltd. [1955] 27 ITR 34, the Supreme Court has reiterated that a lump sum payment made prior to the year in question could be allowable to be properly charged if referable for the earning of the profit for the year in question. Reference was also made to the decision of the Allahabad High Court in In re Hindustan Commercial Bank Ltd. [1952] 21 ITR 353. There the assessee, a bank, incurred during the relevant accounting year certain expenditure in opening 46 new branches, sub-branches and pay offices. A sum of Rs. 24,675 represented charges for advertisement, entertainment, photos and invitation cards and a sum of Rs. 89,870 represented salary, dearness and other allowances, tax on salaries, postage, telegram, telephones, rent, lighting, travelling expenses and conveyance. The question was whether the assessee was entitled to deduct these two sums, under s. 10(2)(xv) of the Indian I.T. Act, 1922. The Appellate Tribunal held that the expenditure of Rs. 24,675 was of a capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hyderabad Income-tax Act corresponding to s. 10(2)(xv) of the Indian I.T. Act, 1922. It was held by majority that the assessee acquired by his long-term lease the right to win stones and the leases conveyed to him a part of land. The payment, though periodic in fact, was neither rent nor royalty but a lamp payment in instalments for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions. If in, a particular case a right of a permanent nature was acquired and payment was made in exchange for that, then, of course, this principle would be attracted., But in view of the nature of the obligations undertaken by the agreement and the obligation to pay upon the performance of certain obligations performed in the year in question, in our opinion, the ratio of the said decision would not be attracted, in the facts of the instant case. Our attention was drawn to the decision of the Division Bench of this court in the case of Agarwal Hardware Works (P.) Ltd. v. CIT [1980] 121 ITR 510. Analysing the various decisions and the provisions of the Act and reading the agreement as a whole it appeared that the ..... 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