TMI Blog1997 (2) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the Tribunal was right in holding that 25 per cent. of the amount paid by the assessee as royalty to Jonas Woodhead and Sons, was capital expenditure and, therefore, not allowable as a revenue expenditure under the provisions of the Income-tax Act, 1961, for the assessment years 1967-68 and 1968-69 ?" The aforesaid question of law arose out of the order of the Appellate Tribunal arising out of the assessment proceedings for the assessment years 1967-68 and 1968-69. The assessee, a limited company incorporated in March, 1963, to carry on the business of manufacture of automobiles springs, entered into an agreement with Jonas Woodhead and Sons Ltd. (hereinafter referred to as "the foreign company"), of the United Kingdom for manufacture of all types of springs and suspensions for road and rail vehicles. Under the terms and conditions of the agreement between the parties it was stipulated that the foreign firm will give the assessee the technical information and know-how relating to the setting up of a plant suitable for manufacture of the products as well as the technical knowhow relating to the setting up of the plant itself, the drawings, estimates, specifications, manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts in that factory. The judgment of the High Court has since been in Jonas Woodhead and Sons (India) Ltd. v. CIT [19791 117 ITR 55 (Mad) [FB]. Mrs. Janaki Ramachandran, learned counsel appearing for the appellant, contended that the High Court was in error in answering the question in favour of the Revenue on a finding that the payment was made to the foreign company for obtaining advantage of enduring benefit inasmuch as it does not offer any advantage of enduring nature acquired by the assessee which could be held to be capital expenditure. According to learned counsel, the payments made by the assessee to the foreign firm for the technical know how and assistance rendered by the said foreign firm enabled the assessee to carry on its business more efficiently and more profitably leaving fixed capital untouched and, therefore, the said payment or any part of it cannot be held to be a capital expenditure. In support of this contention, reliance was placed on the decision of this court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. According to learned counsel for the appellant, technical know-how or technical advice received from a foreign firm cannot be held to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the factory that has been set up with the collaboration of the foreign firm ; the cumulative effect on a construction of the various terms and conditions of the agreement ; whether the assessee derived benefits coming to its capital for which the payment was made. This court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 has indicated that "in the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is not possible to form any general rule even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation". This court further held that there is no single definitive criterion which, by itself, is demarcative, whether a particular outlay is capital or revenue. And, therefore, the "once for all" test as well as the test of "enduring benefit" may not be conclusive. Consequently, the various terms and conditions of the agreement, the advantage derived by an assessee under the agreement, the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the licence, the payments made by the assessee to the foreign firm for the technical know-how will be in the nature of a licence fee and will constitute an expenditure in the computation of profits and gains and cannot be held to be a capital expenditure. In the case of CIT v. Sarada Binding Works [1976] 102 ITR 187 (Mad), the question for consideration was whether the consideration for a transaction which consists of partly a fixed annual sum and partly a periodical payment at a certain percentage of the profits earned by the assessee from the said business would be treated in its entirety as capital expenditure or revenue expenditure. The Madras High Court came to the conclusion that the fixed sum paid towards part of the consideration will be capital payment, while the periodical payments of sums which are definite and which depend upon the future profits cannot be treated as capital expenditure. In other words, the court answered the question that since the payment in question to be made by the assessee was not related to any specified sum but a percentage of the profits to be earned which were indefinite in nature, such payment could be treated only as revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of capital expenditure and as such no deduction could be claimed. This court reversed the decision of the High Court and held that the acquisition of additional "loom hours" did not add to the fixed capital of the assessee ; the permanent structure of which the income was obtained remained the same. The expenditure incurred for the purpose of operating the looms for longer working hours was primarily and essentially related to the operation or working of the looms which constituted the profit-making apparatus of the appellant and was expenditure laid out as a part of the process of profit-earning. It was an outlay of business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on ; it was a part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. The court further observed as under : "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 by an assessee that brings the case within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants ; but as masters they tend to be overexacting. (iii) The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it. 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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