TMI Blog1995 (10) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Tribunal was right in law in allowing the claim of the assessee for interest under section 220(2) of the Act as revenue expenditure ? " As far as question No. 1 is concerned, the relevant facts found by the Tribunal are that the assessee purchased three items of machinery in the years 1965 and 1966 for a total amount of Rs. 7,26,394 D. M. The liability of the purchase price was discharged by obtaining a foreign exchange loan from the ICICI. The payment was to be made in foreign currency only and the repayment schedule was spread over a period of 11 years, two instalments being paid in each year. In the books of account, the loan was maintained in rupees at the exchange rate on the date when the machinery was purchased. On January 1, 1976, the balance amount of loan payable to the ICICI on account of the machinery was Rs. 2,17,252 equivalent to D. M. 93,643. On June 30, 1976, an instalment of D. M. 45,866 was paid for which the payment in rupees amounted to 1,68,007 as against which the balance provided for in the books at the original exchange rate was Rs. 1,06,409. This involved a payment of Rs. 61,598 extra towards the instalment. Likewise, on the second instalment paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On appeal, the Commissioner (Appeals) allowed the claim of the assessee. While dismissing the appeal preferred by the Department, the Tribunal found that the assessee had entered into two different agreements with Mettur Beardsell--one for the supply of technical know-how and service agreement and the other for the use of trade mark " Tebilized ". Both these agreements were dated September 30, 1972. The Tribunal further found that the supply of know-how agreement dated September 30, 1972, was supplementary to the main agreement dated December 29, 1970, entered into between the assessee-company, Mettur Beardsell Limited, and Arvind Mills Limited. The Tribunal further observed that the assessee was using the trade mark " Tebilized " representing a particular process and had also to stamp the trade mark on the cloth produced, and that the payment of royalty for the use of the said trade mark by the assessee-company was at the rate of a particular amount per sq. metre and that the same clearly indicated that the expenditure was connected with the production. The Tribunal held that the payment of royalty was clearly under the agreement between the assessee and Mettur Beardsell Limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng manufactured by the above two assessee-companies. It was, therefore, contended on behalf of the assessee that neither the assessee's capital asset was brought into existence nor was any right of permanent character conferred on the assessee. Learned counsel also pressed into service a series of judgments of the apex court in this behalf. Having considered the material on record and the rival submissions, in our opinion, there is considerable force in the submissions of learned counsel for the assessee. In a catena of decisions, their Lordships of the Supreme Court have held that while determining the question, whether a particular item of expenditure can be considered as revenue expenditure or capital expenditure, what is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities and that in a given case the test of enduring benefit might break down. In the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692, the Supreme Court was concerned with an agreement under which the assessee acquired merely a right to draw, for the purpose of carrying its business activities as the manufacturer and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied). It is clear from the facts of the present case also that the assessee was already carrying on an existing business of manufacturing cloth. The process employed under the trade name " Tebilized " conferred anti-crease property on the cloth. The assessee thus entered into the above agreements dated September 30, 1972, for the purpose of enabling the assessee to carry on its business more efficiently and more profitably, while leaving the fixed capital untouched. The agreements permitting the assessee to make use of the particular process and the user of the trade mark " Tebilized " did not create any asset nor did they confer any right of a permanent nature in favour of the assessee. Apart from the fact that the agreements in the present case do not confer any right for exclusive user, the duration of the agreement is for only eight years, that too terminable by six months' prior notice. The agreements merely enable the assessee to confer on the product the advantages of better quality and marketability. The payment of royalty in the instant case was, therefore, clearly in the course of profit-earning process and not for acquisition of an asset or right of a permanent char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to make the following significant observations, which were of course in the context of medical science, but which are as much applicable to other branches of science and technology (at page 390) : " It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality 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 Calcutta High Court in the case of CIT v. Avery India Ltd. [1994] 207 ITR 813 and the Andhra Pradesh High Court in the case of Coromandel Fertilizers Ltd. v. CIT [1984] 148 ITR 546 have also taken the above view that having regard to the rapid pace of scientific and techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... squarely covered by the ratio in the case of Alembic Chemical Works [1989] 177 ITR 377 (SC) and not by the ratio in the case of Scientific Engineering House Pvt. Ltd. [1986] 157 ITR 86 (SC). In our opinion, therefore, after applying the test laid down by the apex court in various decisions, the irresistible conclusion is that the expenditure incurred by the assessee in the present case for the user of the trade mark " Tebilized " was a revenue expenditure. Our answer to question No. 2 is accordingly in the affirmative, i.e., in favour of the assessee-company and against the Revenue. As far as question No. 3 regarding deductibility of interest paid under section 220(2) of the Income-tax Act is concerned, learned counsel for the assessee fairly stated that the issue was practically covered by the decision of this court in the case of Saurashtra Cement and Chemical Industries Ltd. v. CIT [1995] 213 ITR 523 wherein this court relied upon and followed the view of the Supreme Court in the case of Smt. Padmavati Jaikrishna v. Addl. CIT [1987] 166 ITR 176. It has been held that in view of difference in the nature of income-tax, which is a direct tax, on the one hand, and sales tax and e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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