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TMI Blog1976 (8) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... net profit, but, on the other hand, it was a case of remuneration for specific services rendered ? " In regard to the assessment year 1963-64, the following question has also been referred : " Whether depreciation and development rebates were allowable to the assessee-company in respect of the technical know-how report ? Similarly, for the assessment year 1964-65, one more question has also been referred being : " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in treating the contribution made to the two hospitals as expenditure of a revenue nature ? " Assessee is a public limited company by name Belpahar Refractories Ltd. with its registered office at Belpahar within this State. The company was born out of a collaboration agreement (hereafter referred to as " the agreement ") dated November 6, 1 9 5 7, between the Tata Iron and Steel Company Ltd. (hereafter referred to as " the TISCO "), the Tata Industries (Pvt.) Ltd. (hereafter referred to as " the TATAS ") and Didier Works A.G., a company incorporated in West Germany (hereinafter referred to as " the German Company "). During the material time the shareholdings in the assessee-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... render all technical services in connection with the erection, installation and starting up of the plants. The German company also undertook that the two plants shall have incorporated in them the latest improvements and designs and shall fulfil the performance guarantee as regards the quantity and quality of the products set out in a schedule of that separate agreement. The expression " technical services " which were to be rendered by the German company included : " (a) Collection and analysis of the engineering data and other information, preparation of preliminary cost, estimated and making investigations and other preliminary studies as required for the formulation of definite plans and designs for the said plants. (b) Preparation of detail drawings and statistical calculations for buildings to house the said two plants. (c) Advice on tenders and on placing of orders for materials and equipment to be purchased in India and expediting the same. (d) Supervision of erection and completion of erection of the said two plants and putting them into commercial operation. (e) Communication of know-how and technical information and processes in respect of the said two plants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57,681 1966-67 5,87,729. The assessee-company claimed these as deductible expenses but the Income-tax Officer disallowed the claims in the respective years by holding that they represented capital expenditure as according to the Income-tax Officer, the assessee derived a benefit of an enduring, nature in lieu of these payments. On appeal to the Appellate Assistant Commissioner, in respect of the first two years, he adopted the reasoning of the Income-tax Officer for disallowing the assessee's claim and in the second group of three years, he sustained the disallowance by holding that the remuneration paid in these years to the German company was in reality a sharing of profits. For his conclusion, he drew support from the decision of the Judicial Committee of the Privy Council in the case of Pondicherry Railway Co. Ltd. v. Commissioner of income-tax [1931] 5 ITC 363 (PC). In assessee's further appeals to the Appellate Tribunal which were heard by the Bombay Bench, the assessee claimed that the payments were essentially made on revenue account by way of remuneration payable to the German company for its services rendered in terms of the separate agreement. It was alternative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of the claim for depreciation and development rebate in respect of the technical know-how report and the contributions made to the hospitals. The Tribunal has found in the assessment year 1963-64 that the assessee claimed under the head of operational and other expenses a sum of Rs. 1,25,190. Out of this amount, the Income-tax Officer found that Rs. 481 had been spent in connection with execution of the agreement relating to the use by the assessee in their factory at Belpahar of the patent devised by one Mr. Russel P. Hauer. The balance amount had been paid for preparation of the technical know-how report as per clause 5(a) of the agreement dated December 12, 1961. The Income-tax Officer treated this as a capital expenditure and the Appellate Assistant Commissioner upheld that conclusion. The Tribunal in paragraph 28 of its appellate decision came to hold : " The assessee's representative took us through the agreement of December 12, 1961, between the assessee-company and R. P. Hauer and admitted that the agreement was for the acquisition of the complete know-how report relating to the basic refractory bricks. Hauer agreed to train not more than three men at the company' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset belonging to the assessee was brought into existence as a result of this expenditure. This was incurred only as a part of the staff welfare expenses. These contributions made by the assessee enabled its employees to take advantage of the hospitalisation facilities provided in those air-conditioned cabins in the two hospitals. Beyond that the assessee did not derive any further advantage. The cabins continued to belong to the hospital authorities. The departmental representative on the other hand emphasised the contents of the letter addressed by the assessee-company to TISCO wherein the two amounts were admitted to have been contributed towards the capital cost of the cabins. We are of the opinion that in this case no capital asset of the assessee has come into existence as a result of the contributions made by the assessee. The amounts were spent only as a part of labour welfare expenses. As a result of this expenditure, the employees of the assessee can avail themselves of the hospitalisation facilities extended by the hospital authorities on a concessional basis. Even if we assume that there was some enduring advantage, we cannot hold that the expenditure was on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the main question common to all the years which we shall now proceed to examine. It may be stated here that the two questions referred by the Tribunal regarding this aspect are indeed one and if we find that the assessee is not entitled to succeed in its claim of the expenditure being revenue in character, the other would not arise. First, we propose to indicate the legal position ; then examine the findings reached by the Tribunal and, lastly, formulate the answer to the question. Lord Chancellor Viscount Cave, in the case of Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL), laid down what has almost universally been accepted as the test for determining what is capital expenditure as distinguished from revenue expenditure. At page 192 of the report the Lord Chancellor observed : " But there remains the question, which I have found more difficult, whether apart from the express prohibitions, the sum in question is (in the words used by Lord Sumner in Usher's case [1914] 6 TC 399 (HL) a proper debit item to be charged against incomings of the trade when computing the profits of it ; or, in other words, whether it is in substance a revenue or a capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us, for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned judges have laid down from time to time. They are as follows : 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company [1927] 13 TC I at page 14 (C Sess). In City of London Contract Corporation v. Styles [1887] 2 TC 239 at page 243 (CA), Bowen L.J. observed as to the capital expenditure as follows : 'You do not use it " for the purpose of " your concern which means, for the purpose of carrying on your concern, but you use it to acquire the concern.' 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade : vide Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. 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 a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern 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 is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authors almost certainly did not have in mind--in seeking to treat expressions of judicial opinion as if they were words in an Act of Parliament. And a further source of difficulty has been a tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to other factors in the case. The true view appears to me to be that stated by Lord Macmillan in Van den Berghs Ltd. v. Clark [1935] AC 431 ; [1935] 3 ITR (Eng. Cas) 17 (HL) 'While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem'. " Lord Reid again observed : " So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but, it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmally capital in nature........" Dr. Pal for the assessee relying on the decision in the case of Commissioner of Income-tax v. Ciba of India Ltd. [1968] 69 ITR 692 (SC) made an attempt to point out that the conclusion of the Tribunal that a capital asset was acquired was not appropriate. But learned counsel conceded that the assessee was not entitled to dispute the aforesaid finding of the Tribunal in the absence of a reference made at its instance of a question allowing within its ambit scope to dispute the finding. We shall, therefore, proceed on the footing that the Tribunal's finding that the expenditure in regard to which deduction has been claimed was utilised for obtaining a capital asset for the assessee is final. Even after holding that a capital asset had sprung up for the company as a result of the impugned expenditure, the Tribunal came to hold that the same were revenue in character and, therefore, the claims of deduction were admissible. For doing so, the Tribunal mainly relied upon the decision of the Supreme Court in the case of Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax [1966] 62 ITR 566 (SC). It is appropriate to ascertain the true ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, took the view that the payment was by way of commission and, therefore, was an expenditure' made in order to earn profits of the business and it was not an expenditure paid out of earned profits and accordingly accepted the assessee's stand. At the instance of the revenue, the following question had been referred to the High Court of Kerala : " Whether, on the facts and in the circumstances of the case, the payment of Rs. 42,480 by the assessee to the Travancore Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Income-tax Act ? " The High Court held that the amount constituted capital expenditure and, therefore, the claim was not admissible. The assessee, therefore, came in appeal before the Supreme Court. In support of the assessee's stand, it was pointed out that the annual payments were not part of the purchase price of the assets. Reference was made to clauses 3, 4(a) and 5(a) of the agreement and it was said that separate and full considerations had been provided for the purchase of the assets of the Travancore Sugars Ltd., the Government distillery and the Government tincture factory. In addition to sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. On the contrary, the very nature of the payments excluded the idea that any connection with the capital sum was intended by the parties. The court indicated : " The mere fact that the capital sum is payable by instalments spread over a certain length of time will not convert the nature of that payment from the capital expenditure into a revenue expenditure, but the payment of instalments in such a case would always have some relationship to the actual price fixed for the sale of the particular undertaking. As we have already mentioned, there is no specific sum fixed in the present case as an additional amount of price payable in addition to the cash consideration and payable by instalments or by any particular method. In view of these facts we are of opinion that the payment of the annual sum of Rs. 42,480 in the present case is not in the nature of capital expenditure but is in the nature of revenue expenditure...... The facts of the Travancore Sugars' case [1966] 62 ITR 566 (SC) are very different from the set of facts of the case before us. In that case, admittedly, certain assets were acquired by an agreement of sale. Three units were being purchased. For the sugar compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income. Secondly, there are cases where the payments are all treated as capital and are neither taxable to the recipient nor deductible in computing the payer's total income. Thirdly, there are cases where the payments must be dissected into an income content and a capital content so that the former part is taxable and deductible whilst the latter is not. " The Tribunal, however, negatived such a position and that has no more been disputed before us. In this view of the matter, we do not think that the assessee is entitled to fall back upon the ratio indicated in Travancore Sugars' case [1966] 62 ITR 566 (SC), and persuade us to accept its stand that the disputed amounts represent deductible revenue expenses. Dr. Pal placed before us a recent decision of the Madras High Court being the case of Commissioner of Income-tax v. Sarada Binding Works [1976] 102 ITR 187 (Mad), wherein, even though the agreement amounted to an outright purchase of a business by the assessee, the payment which was not related to any specified sums which was agreed upon by the parties as the purchase price of the business was treated to be a revenue expenditure and reliance was placed on the Travan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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