Vildirect: IncomeTax-caselaws-1986-VIL-71-ITAT-DEL

1986-VIL-71-ITAT-DEL

Equivalent Citation: ITD 018, 490,

Income Tax Appellate Tribunal DELHI

Date: 11.04.1986

INCOME-TAX OFFICER.

JK. SYNTHETICS LTD.

BENCH

Member(s) : CH. G. KRISHNAMURTHY., S. P. KAPUR.

JUDGMENT

Per Shri Ch. G. Krishnamurthy, Senior vice President -This is an appeal filed by the ITO,New Delhi against the order of the Commissioner [Appeals] taking objection to certain reliefs granted by him. This appeal relates to the assessment year 1976-77 and we will take up the points is the order in which they are raised in the grounds of appeal and dispose them of.

2. The assessee is public limited company doing extensive business of several varieties atkanpur. The first objection in this appeal filed by the revenue is against the allowance of travelling expenditure by the Commissioner [Appeals] of Rs. 2,38,067. Out of a total claim of RS. 6,37,991 the ITO picked out 9 items totalling to Rs. 2,38,067 for disallowance as capital expenditure. His view was that the concerned persons, who went abroad and incurred this expenditure were negotiating either for the establishment of new industry or for expansion of the existing industry and either of them was on capital account and, thus, the expenditure incurred in the regard could only be considered as capital expenditure. The full details for this sum were given in the assessment order. They could be categorised into two board heads one was expenditure of Rs. 1,04,710 incurred to go toKenyaand other in regard to either establishment of a cement factory abroad or for installation of a drought twisting machine involving expenditure of Rs. 73,730 and Rs. 59.025, respectively. We have already referred to how the ITO regarded the expenditure on all these three counts as capital expenditure but when the matter came on appeal before the Commissioner (Appeals), he analysed the reasons for this expenditure and found that no capital expenditure was at all involved. In Kenya a company called Africa Synthetics Fibre Ltd. Was incorporated, in which the assessee had to invest 49 per cent of the Capital, another 49 per cent was to be invested by the Government of Kenya through a public sector undertaken called ICDC and the balance 2 per cent was to be subscribed by the citizens of Kenya. The equity portion to be contributed by the assessee company was to be adjusted by the know how fees that the assessee was to get under the agreement and also by the value of the machinery supplied to the Kenyan project which is joint venture. This is clearly provided for in the agreement entered into between the assessee company and the Government of Kenya. The Commissioner [Appeals] pointed out that the persons who undertook the tour toKenyato discuss with the Finance Minister, the Government of Kenya and other high officials was only in connection with the supply of machinery or the supply of know how. This purpose of the visit was misunderstood by the ITO as for the establishment of a factory inKenya, and therefore, a capital expenditure over looking the fact that it was in pursuance of the agreement. The Commissioner [Appeals] further found that the expenditure incurred by these officials go toKenyawas only to earn revenue income by way of know how fees from the Kenyan company to which the assessee company rendered service for the erection of their synthetic fibre plant. He also found that the know how fees received was taxed as income in subsequent year of a substantial amount namely Rs. 15.43 lakhs in 1977 and bout Rs. 34.60 lakhs in 1979 besides the assessee company also exported machinery worth Rs. 42.54 lakhs in 1978 and Rs. 74.74 lakhs in 1979, which was a part of the assessee's sale proceeds. So the executives of the assessee company had to visitkenyaeither to render technical services in the erection of the plant as per agreement or to earn the technical know how fees. The Commissioner [Appeals] further found that from the directors report it was seen that a new company referred to above, namely. Africa Synthetics Fibre Ltd. was incorporated in Kenya on 4-9-1975 and that the assessee-company was appointed as managing agents for managing the project for a period of eight years and it was in pursuance of that agreement and with a view to manage the said company the assessee's executive have to visit Kenya frequently. On an examination of this evidence the Commissioner [Appeals] gave a finding that the expenditure incurred by the assessee was for the purpose of earning income by the promotion of its sales and, therefore, the expenditure was revenue expenditure. The ITO relied upon very strongly a decision of the Andhra pradesh High court in the case of Hyderabad Allwyn Metal Works Ltd. v. CIT [1975] 98 ITR 555. The commissioner [Appeals] not only distinguished this case but also pointed out that the ratio laid down in that case helps the assessee on the present facts. Against this decision of the Commissioner [Appeals] the department felt aggrieved and filed this appeal. The departmental representative reiterated the contention the ITO took in his order but the fact remains that the facts found by the Commissioner [Appeals] were not controverted or even shown to be either non existent or false. The assessee company was having a dual role. In these circumstances, we have no hesitation in saying that the ITO misjudged the purpose of the visit of the employees of the assessee company to Kenya and came to an erroneous conclusion that that expenditure was incurred for the purpose of establishing a factory there in Kenya treating the factory as if it is the assessee's own factory. He has evidently into with the Government of Kenya and how the assessee company got involved in that project, which is nothing but promoting the sales of the assessee's as well as earning technical fees. The most important thing to be noted is that the assessee company is engaged in the fabrication of plant for the manufacture of synthetic fibres. The plant fabricated by the assessee is its stock-in-trade, and any expenditure incurred in the selling of the stock in trade even if the selling parat includes erection of the plant for the purpose of client as part of sales cannot but be treated otherwise than as revenue expenditure. The view taken by the Commissioner [Appeals] in respect of this segment of expenditure cannot be assailed. The next item of a sum of Rs. 73,730 incurred on the visit of Shri S. L. Singhania Rs. 43,309 and Shri S. S. Misra Rs. 30,421. The reason advanced by the ITO for the disallowance of this sum was that these persons, who went abroad, submitted a report according to which the purpose of the visit was to contact various fabricators of plant and machinery for the cement industry and to further explore the possibility of collaboration of fabricating plant and machinery for the cement and, therefore, this expenditure was of capital nature. The assessee company explained to the Commissioner [Appeals] with which he agreed on verification that the assessee was already a manufacture of cement at a place called Nimba Hera in Madhya Pradesh and any expenditure incurred by the assessee in the promotion of its sales was revenue expenditure. Another point noticed by the Commissioner [Appeals] of considerable relevance and significance is that the assessee was manufacturing portland cement inIndiaand by incurring this expenditure on travel the assessee was only seeking the expansion of its plant and machinery. That the assessee was exploring the possibly to expansion of the plant and machinery for the cement business was not in dispute. In fact it was admitted. Thus, the expenditure was in connection with the existing line of business although it was for the purpose of expansion. It is now a trite law that any expenditure incurred in connection with expansion of existing business is revenue expenditure and not capital expenditure if it was on travelling. Here again the Commissioner [Appeals] referred to the observations made by the Andhra Pradesh High court in the case of Hyderabad Allwyn metal works Ltd, case and held that the expenditure incurred in connection with any of the business which the company was already carrying on was to be allowed as revenue expenditure because the purpose of incurring to the further expenditure was to increase its profitability i.e. maximise its profits. In the appeal filed against this view of the commissioner [Appeals] noting was mentioned to us by way of finding fault with the facts found by the Commissioner [Appeals]. All that was urged was that the expenditure incurred on expansion of an existing plant was to be regarded as capital expenditure and should not have been regarded as revenue expenditure by importing into it the theory that for the purpose of grant of section 80J of the Income tax Act, 1961 ('the Act'), relief expansion of existing business was judicially noticed as amounting to establishment of new industrial undertaking and on the same analogy the expansion should also be considered as a new under taking. This argument overlooks the fact that the purpose of section 80J was different from the considerations to be kept in mind for treating the expenditure for the purpose of section 34 of the act as of capital or revenue. A revenue expenditure incurred could also be in the establishment of a new industrial undertaking. Those considerations are therefore, not to be improved here. We are of the view that the Commissioner [Appeals] is quite correct in his view and we do not find any occasion to interfere with that conclusion. The next batch of expenditure is of a sum of Rs. 59,625 made up of Rs. 40,231 incurred by shri S. R. Singhania and Rs. 19, 394 by Shri B. N. V. Iyengar. Both these expenses were incurred in connection with the manufacturing program of various machines, in particular drought twisting machine. The ITO like in other case had considered this expenditure to be capital expenditure because this was for the purpose of discussions with foreign companies in West Germany etc. in connection with the expansion programme and also to obtain drawings and designs, etc. But what the Commissioner [appeals] found, which could not now be disputed was that the assessee had established already a division known as Fibre Technical Engg. Manufacture solely with a view top manufacture machines to be utilised for the production of on yarn. The expenditure incurred by the assessee on the tour of theses two persons was in connection with the obtaining of details for the proper and efficient running and manufacture of these machines. The expenditure incurred in this connection was in connection with the existing plant and not with a view to set up a new plant as was supposed by the ITO like in other cases discussed above, In view of this categorical finding by the Commissioner [Appeals] which went undisputed before us, we have no doubt in our mind that this expenditure was rightly allowed by the Commissioner [appeals] and there was no element of capital expenditure involved in it. Distinction has always to be drawn between an expenditure incurred in connection with existing plant or line of business and an expenditure incurred in connection with the setting up of a new plant. While the latter is capital expenditure the former is revenue expenditure. The expenditure disallowed by the ITO in all the 9 items above falls in the former category. This was the finding of fact recorded by the Commissioner [Appeals] which the department was not able to dislodge. We are therefore, of the opinion that the view expressed by the Commissioner [Appeals] is correct and we confirm it.

3. Then there is another item of travelling expenditure incurred of Rs. 37,064 which was also disallowed by the ITO but allowed by the Commissioner [Appeals]. this consisted of four items again :

Rs.

 8,000      On travelling of Smt S. M.Lal wife of Shri S. M. Lal, General Manager

 6,402      On travelling of Smt. Veena Singhania

15,214      On travelling of Shri S. P. Satia

 7,448      On travelling of Shri S. R. Singhania

The reason for the disallowance of the amount incurred on Smt S. M. Lal and Smt. Veena Singhania was that they were ladies and that they had no business purpose to serve for the assessee company to plead that the expenses were incurred for the purpose of the business. Merely because they accompanied their husbands on foreign tours even though it is for the business purpose, their husbands on foreign tours even though it is for the business purpose. theirs [wives] did not become business tours. But the Commissioner [Appeals] found following the rule laid down by the Supreme court in the case of shahzada Nand and sons v. CIT [1977] 108 ITR 358 that the expenditure incurred by the company on the wife of its loyal employees to enable her to accompany him on foreign tour in order that the tour of the employee was successful could only be regarded as an expenditure incurred both by way of rewarding the loyal employee and thereby create goodwill amount the employees and to encourage other employees through them to work with greater loyalty and devotion. this view is assailed before us by the revenue. It is not disputed that neither shri S. M. Lal nor Shri Singhania were the directors of the assessee company, not their relatives. They were only highly qualified technical persons employed over a long period of time. Their foreign tours became a necessity for the purpose of the company's business and it also became necessary for their wives to accompany them. We agree with the view expressed by the Commissioner [Appeals] that this kind of expenditure would act as an incentive for the other employees to work with zeal, devotion and dedication which in the ultimate analyses results in higher profitability. This expenditure cannot, therefore, be looked at divorced from this angle. Any expenditure incurred with a view to keep the employees satisfied and to induce them to give their best is an expenditure incurred for the purpose of the business and not de hours business. We also find that this was the view expressed by the Tribunal in the assessee's won case in the immediately preceding assessment years 1975-76 in IT Appeal No. 4548 of 1980. In these circumstances, we cannot find exception to the view expressed by the Commissioner [Appeals] and we confirm it. That takes us to the expenditure incurred on Shri S. P. Satia and Shri S. R. Singhania. The reason adduced by the ITO was that the assessee company did not furnish the purpose of the visit of these persons abroad while one went to Japan the other went toAmerica. When the assessee explained to the Commissioner [Appeals] that this allegation was unfair because the ITO never asked the assessee to explain the purpose, it was further explained that Shri S. P. Satia had to go abroad to study the latest technology for the manufacture of nylon type chord and staple fibre. Since both these purposes were exclusively business purposes the Commissioner [Appeals] felt no difficult in accepting the assessee's claim and allowing this expenditure. Now the department claim is that the Commissioner [Appeals] was wrong in allowing it but it is not shown to us how he was wrong. These employees undoubtedly went abroad for the purpose of the business. The expenditure incurred cannot, therefore, be said to be otherwise than for business purpose. The department should be able to prove that the purpose of these visits was not for the purpose of the business. To this end no evidence is led before, us. We are therefore, unable to disagree with the Commissioner [Appeals]. He has given very cogent reasons for the allowance of this claim. This ground is therefore, also not accepted.

4. Before we go to the next ground, we must dispose of a departments contention based upon the decision of the Delhi High court in Addl. CIT v. Delhi Cloth and General Mills co. ltd. [1983] 144 ITR 280. In this case, the Delhi High court held that an expenditure incurred on foreign tours of directors and officers for selection and purchases of machinery and plant for new project formed part of the actual cost of the machinery and plant and not revenue expenditure. This decision was relied upon to show that the view taken by the ITO was correct but this decision is distinguishable because unlike in that case here the expenditure was incurred not for the selection and purchase of machinery for a new project but for an existing project and this fact makes all the difference.

5. The next ground relates to the allowance of payment of Rs. 30,57,499 paid to a company called Tecnimont, SPA Italy relating to technical know how and another sum of Rs. 3,48,033 paid to IWKA, west Germany. The assessee company with a view to erect a plant for the manufacture of acrylic fibre at Kota entered into a collaboration agreement with a company called Tecnimont of Italy and another company called IWKA, West Germany. This agreement was entered into on29-4-1974providing for the payment of technical know how fees. The total amount payable expressed in terms of rupees was 54,45,794 or 623 million lire [Italian currency] The break up of this was as under :

[i] 186.5 million lire for the grant of the process and know how license.

[ii] 250 million lire for the supply of the know how and basic design engineering of the plant.

[iii] 186.6 million lire for the supply of technical assistance and continuous know how inItaly, including training of the company's personnel inItaly.

Out of this 250 million lire payable for supply of basic engineering of the plant was treated by the assessee company as capital expenditure and the remaining two items of 186.5 million lire the equivalent of which in Indian currency is Rs. 30,57,499 were treated as revenue expenditure on the ground that they represented expenditure, for efficient running of the businesses after commencement of production. This plea was based on the view that any expenditure incurred on running of a business in a more efficient manner is always an expenditure incurred on revenue account. The ITO found on enquiry that the erection of the factory was not complete and, therefore, there was no question of running business in a more efficiently. The business not having been started, the expenditure incurred could not be said to have been of revenue nature. BY referring to certain decision more particularly the decision of the supreme court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 the ITO disallowed the claim of the assessee by treating it as capital expenditure. He disqualified this expenditure even from the allowance of depreciation and development rebate. This is in main the reason that prevailed with the ITO to disallow the claim. But the Commissioner [Appeals] on appeal took a different view. The Commissioner [Appeals] analysed the agreement and found certain salient factors having bearing on the subject of allowability. He found :

1. Know-how and patent rights for producing acrylic fibre from acrylonitrile monomer were owned by a concern known as Montefibre of Italy, which were successors to another concern known as Chatillion.

2. Montefibre while owing the know how and patent rights had transferred the right to license to another concern known as Tecnimont.

3. Tecnimont had the experience and capability for providing basic design and technical services for the design, erection and operation of the plant for manufacturing acrylic fibre.

4. Technimont agreed to grant the know how and patent right and to offer these services to J. K. Synthetics.

5. The consideration for the use of Know how, basic design engineering and technical assistance was fixed at 623 million Italian lire, consisting of :

[a] 186.5 million lire for grant of process and know how license for manufacturing acrylic fibre.

[b] 250 million lire for supply of know how and basic design engineering for setting up the plant.

[c] 186.5 million lire for supply of technical assistance and continuous know how including training of J. K.'s personnel for running the plant.

After referring to the ratio of the several decided case the Commissioner (Appeals) posed the question whether what was acquired under the agreement was merely a license for the user of the technical knowledge of the foreign collaborator. According to him by the payment of these sums the assessee acquired only a license which did not bring into existence as asset of enduring nature. He also found that the ownership of the technical know-how did not vest in Tecnimont with whom the assessee company entered into an agreement but the ownership vested in another company called Montefibre from whom Tecnimont had acquired the right to give on license the know-how on patent rights. This is the view he held in regard to the first payment of 186.5 million lire. With regard to the payment of other 186.5 million lire, the Commissioner (Appeals) held that that was specifically provided for not only the technical assistance and continuous know-how to be provided by Tecnimont but also for training J. K. personnel by them. Thus, he held that this was also of revenue nature. Since the payments which related to the setting up on the plant were treated as capital expenditure, theses two amounts, one fro the use of technical know-how as license fee and the other for training of J. K. personnel was of revenue nature. Dealing with the question whether the expenditure could be allowed in an year in which the plant did not go into production, the Commissioner (Appeals) relying upon the decision of the Allahabad High Court in the case of Prem Spg. & Wvg. Mills Co Ltd. v. CIT [1975] 98 ITR 20 held that the liability for payment arose under the terms of the contract in the year mercantile basis, the amounts were to be deducted in the year in which the liability arose. He further held that the manufacture of acrylic fibre for which the payment were made was not different from the manufacture of synthetic fibre which the assessee-company was already manufacturing and in that sense the setting up of plant for acrylic fibre was only an expenditure was laid out for the existing business activities and, therefore, the expenditure was lied out for the purpose of earning more profit from the existing business. He also ruled that the payments made to Tecnimont could not be considered as advance payments because under the terms of the agreement the payments were to be made in accordance with the fixed schedule of payment irrespective of the period during which the services were rendered by Tecnimont. Thus, he held that the sum of Rs. 30,57,499 paid to Tecnimont was revenue expenditure. With regard to the payment made to IWKA, West Germany of Rs. 3,48,033 the Commissioner (Appeals) found that this was towards know-how fees for the manufacture of take-up machines FEM of the company, that the company entered into collaboration agreement with IWKA, West Germany for the manufacture of these machines in Ghaziabad, that the plant had already gone into production and that the payment of Rs. 3,48,033 was for supply of technical know-how for the manufacture of these machines. He examined the agreement entered into by the assessee-company with IWKA,West Germanyand found that the assessee-company was granted exclusive manufacturing license for the Indian Union and that the assessee was not permitted to use any knowledge or experience gained under this contract for any other purpose. IWKA were to provide to the assessee-company the following services :

(a) Assistance inGermanyin planning, construction and installation of J. K.'s engineering workshop;

(b) Delivery inGermanyof drawings and technical data;

(d) Transfer in Germany IWKA sales know-how;

(e) Training of specialists for JK inGermanyandIndia;

(f) Delegation of IWKA staff members for technical assistance toIndia;

(g) Exchange of experiences including continued technical assistance and development.

On these facts he came to the conclusion that the expenditure on the know-how claimed during the year under consideration was in respect of a business which was already in existence. The payments were, therefore, for the user of the license and were akin to the payments made to Tecnimont. He, therefore, allowed this expenditure also. The department is aggrieved by this decision. The departmental representative submitted relying upon the judgment of the Allahabad High Court in the Case of Ram Kumar Pharmaceutical Works v. CIT [1979] 119 ITR 33 that by the payment of this sum the assessee-company purchased outright the rights to use the technical know-how without any reference to period of time. Thus, the assessee became the owner of those rights. It is, therefore, not a case of payment made for user of licence and consequently the decision given by the Commissioner (Appeals) was incorrect. He referred to clauses 2.11 and 2.12 of the agreement to support his claim that the assessee purchased these rights. The articles clearly provided that Tecnimont parted with know-how without any limit of time. It was secret and it was non-transferable, permanent and irrevocable. These are all the attributes of permanent sale by Tecnimont and permanent acquisition by the assessee. The assessee having acquired the rights as an owner cannot but be said to be the owner of theses rights. The Commissioner (Appeals) misappreciated the articles and erroneously concluded that this payment was for the user of the licence. This is in brief the point made out on behalf of the revenue. On the other hand, on behalf of the assessee placing very strong reliance on the order of the Commissioner (Appeals) and the conclusions arrived at by him, it was submitted by Shri Unni that it was the Montefibre that was the owner of the Know-how, that Tecnimont was only the licensee from Montefibre with a right to sub-lease and when Tecnicmont sub-leased to the assessee the rights it had acquired from Montefibre, it could not be said that the Tecnimont sold those rights and the assessee had become the owner the owner, when it had only the right to sub-lease but not convey the title in that know-now. Therefore, the argument of the department that the assessee purchased the technical know-how cannot hold water. The right of the assessee to use the technical know-how was strictly confined to its business needs. It can only be used for the existing business, not even for expansion or for a new project. Thus, when the rights of user were strictly circumscribed, it cannot be said that the assessee purchased the rights and became the owner thereof. Another point made out by Shri Unni was that any improvement that the assessee-company makes over the technical know-how, that improvement must belong to Montefibre. This situation is inconsistent with the theory of outright sale. It was further pointed out that it is wrong to suggest that user was for an unlimited period while the period was limited to 7 years or in some case 12 years. Any technical know how after a period to 7 years or for that matter even earlier might became obsolete and may become useless more particularly when sweeping changes are taking place so rapidly in technological world. Nothing can therefore be said to be permanent in the sense conferring a permanent and enduring benefit by reason of the technical know-how. By placing very strong reliance upon a decision of the Delhi High Court in the case of Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746, Shri Unni submitted that if the collaboration agreement resulted in the absolute transfer of technical know-how to the assessee only then the assessee could be said to have acquired an asset of enduring advantage but where the payment is made only for obtaining access to information, which does not become its own, the payments cannot be elevated to the status of payment of a capital nature. It was submitted that neither the payments made to Tecnimont nor the payments made to IWKA,West Germanycould be considered as capital expenditure and that the decision given by the Commissioner (Appeals) is just and proper and should be upheld.

6. On29-4-1974the assessee-company entered into an agreement with Technimont, SPA a company situated inItaly. This agreement was called Licence and Technical Assistance Contract, which nomenclature throws certain light on the intention of the parties. This agreement provided that there was another company called Montefibre, which has a successor to Chatillion, another company, became the owner of know-how and patent rights for the design, erection, operation and capability of acrylic fibre. The Tecnimont had only the experience and capability for providing basic design and technical services in the matter of design, erection and production of acrylic fibre. The assessee-company was desirous of setting up a plant atKota, Rajasthan for the production of acrylic fibre. Tecnimont expressed its willingness of offer its services to the assessee-company for providing technical know-how, basic design and technical services for the setting up of the plant and operation and was willing to grant those rights and perform the said services for the assessee-company. It was also prepared to carry out the detailed engineering survey needed for this purpose. With this preamble, the agreement went on to provide that Technical would grant to the assessee-company a non-exclusive, non-transferable permanent and irrevocable licence to use the process and the know-how owned by Montefibre and the relevant patent rights. It also granted the assessee-company the right to sell the products inAsiaexcept in some other countries where Montefibre had the exclusive rights to sell. Montefibre also agreed to grant to the assessee-company a non-exclusive royalty-free licence on the assessee agreeing to grant to Montefibre an exclusive royalty-free licence with the right to sub-licence anywhere in the world any improvements developed by the assessee-company. Tecnimont is to work out the basic design of the plant on the basis of Montefibre technical knowledge to the assessee-company. In case of delay in the delivery of the technical documentation Tecnimont has to competent the assessee-company by paying stipulated liquidator's damages. There is also a provision for the association of the assessee-company's engineers with Tecnimont. Tecnimont shall furnish the assessee-company with technical assistance and advice from the process point of view in conduction with the erection of the plant and make available a team of experts for erection, etc. There is also elaborate provision for the training of the personnel by Tecnimont. Articles 5.5.1 and 5.5.2 provided that the agreement was to last for a period of 7 year. The advice to be given by Tecnimont was also to last for a period of 7 years. Everything that is undertaken by Tecnimont to the assessee was to last only a period of 7 years (see in this context 5.5.1 and 5.5.2). Article 6.8 provided that in case the trial runs after the erection of the plant result in failure the assessee-company and Tecnimont will meet to examine their respective liabilities and come to a friendly settlement taking into consideration the results obtained by the test runs, the liability of Tecnimont being limited to the financial implication provided under the agreement. Article 8 provided that no expansion of the plant or construction of the new plant either in India or anywhere in the world using the process supplied by Tecnimont shall have to be according to the separate agreement entered in to with Tecnimont. Article 9 provided for the payment of the fees which is in the following terms :

"9.1 The fees to be paid by JK to TEC for the use of the know-how in India basic design engineering and technical assistance provided for herein is 623 (Six hundred and twenty-three) million Italian lire consisting of :

(a) 186,500,000, (One hundred eighty-six million five hundred thousand) Italian lire for the grant of the process and know-how licence under article 2;

(b) 250,000,000 (Two hundred and fifty million) Italian lire for the supply of the know-how and basic design engineering as referred to in article 3;

(c) 186,500,000 (One hundred eighty six million five hundred thousand) Italian lire for the supply of technical assistance and continuous know-how in Italy, including training of JK's personnel in Italy, as referred to in article 5.The amounts indicated under (a), (b) and (c) are firm and not subject to escalation."

Article 15 provided for utmost secrecy to be maintained by the assessee-company about the process, know-how as well as the implements. It is on consideration of these important terms in the agreement that we have to see whether as contended for by the department the assessee-company acquired the right for the use of technical knowledge so that it could be said that the assessee is the owner thereof or the assessee by making these payments is only allowed access to information which had not become its own To start with Tecnimont is not the owner of this technical know-how at all. The ownership of the technical know-how belonged to another company called Montefibre. That company owns the know-how as well as the parent rights. Tecnimont has only the right to licence of the know-how. In other words Tecnimont is only a licensee of the know-how of patent right owned by Montefibre. The grant of licence by Montefibre to Tecnimont was non-exclusive and irrevocable and permanent, i.e., to say Tecnimont can sub-lease or sub-licence those right to any one it like it is to enable it to do so, the grant of licence by Montefibre to Tecnimont had to be permanent and irrevocable. When article 2.12 states that Tecnimont grant J. K. a non-exclusive non-transferable, permanent and irrevocable licence to uss the process and the know-how to us it appeared that it was only describing the nature of the licence which the Tecnimont obtained from Montefibre which Tecnimont was awarding to the assessee-company. Thus, when it was Montefibre which was the owner of these patent rights and know-how, when all that Tecnimont had only a right to sub-lease it, and when Tecnimont retained to itself the exclusive right to sub-licence it to others, it cannot be said that it had sold those rights to the assessee-company. This is in our opinion not borne out by the agreements nor can that statement be a valid statement in law. In this context not has to turn one's attention to clause 3 of the preamble which provided that because Tecnimont owned the experience and the capability for providing basic design and technical services for the design, erection and operation of the plant for the production of acrylic fibre, that Montefibre granted the licence to Tecnimont to use those patent rights. This simply means that it is the expertise that Tecnimont had in the operation of a plant for the production of acrylic fibre that the assessee-company is trying to acquire by paying the fees. Therefore, the fees paid are nothing but the fees paid for the use of the experience of Tecnimont whereas the right and the know-how belonged to Montefibre. This must be clearly borne in mind to understand the implication in this case. Once the destruction is borne in mind, it becomes clear that the assessee was making these payments only for the purpose of setting up of the plant and the operation and training of its personnel. It is also incorrect to state that the assessee had obtained without any limit of time the technical know-how from Tecnimont. We have indicated above by referring to the concerned articles that the period limited was 7 years. Therefore, the argument based upon the illimitable time is factually incorrect. In the case before the Allahabad High Court on which greatest reliance was placed on behalf of the revenue, the facts there clearly provided that the assessee purchased the ownership of the know-how and data for use by it in future without any limit of time. Contrasting that situation with a situation where payment was made for the user of the data, the Allahabad High Court held that when an assessee obtains permanent rights over the use of know-how it obtains an advantage of an enduring nature and the payment made thereof would be a capital expenditure. But that is not so here. There before the Allahabad High Court the assessee, a registered firm, carrying on business in the manufacture and sale of saccharin entered into an agreement with a West German concern. Under the agreement, the foreign concern was to transfer to the assessee know how and data for the constriction and operation of a plant for the manufacture of saccharine. The assessee was to pay the foreign concern certain sums and royalty at a fixed percentage on the sale value without any limit of time but subject to a maximum in each year. The question arose whether under the terms of the agreement the assessee could be said to have acquired the ownership of the know-how without any limit of time or merely entitled to use it so long as it continued to pay the royalty. The Allahabad High Court held that the assessee acquired ownership rights without any limit of the time and that was not a case where the assessee's entitlement was only to use it as long as payment of royalty is continued. This was the case strongly relied upon by the departmental representative in support of the department's view. But as we have pointed out above, the assessee before us did not acquire ownership right over the Know-how or the patent right for the simple reason that Tecnimont with which the assessee entered into the agreement did not itself posses those rights except that it acquired a licence to use the experience to impart to others for a fee. Secondly unlike in that agreement, the agreement here has set a time limit. These two fractures distinguish the Allahabad High Court case from the case before us. We may also point out that the Bombay High Court in a very recent decision in the case of Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1985] 157 ITR 751 held that if know-how has been acquired unrelated to secret or patent processes or the right to use a trade name or trade mark then the acquirer of the know how acquired relates to the process of manufacturing then the payment made for the same would acquire no asset of an enduring nature. If know-how acquired relates to the process of manufacturing then the payment made for the same would to be considered as revenue expenditure. In this case, the know-how acquired related to the process of manufacture and no trade name or trade mark had been acquired by the assessee. Therefore, by the application of the rule laid down by the Bombay High Court, the payment made by the assessee would fall in the category of revenue expenditure and not capital expenditure. We have already referred to above the decision of the Delhi High Court in Shriram Refrigeration Industries Ltd. where the Delhi High Court laid down the test as to whether the collaboration agreement resulted in the absolute transfer of technical knowledge or gaining access to the information. The former is held to be capital and the latter revenue. To our mind the agreement provides only access to information and, therefore, this falls in the latter category referred to by the Delhi High Court and, therefore, partakes the character of revenue expenditure. In this context we may usefully refer to the ruling to the where the Supreme Court laid Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 down the latest law on as to when an expenditure could be regarded as of bring an enduring advantage and when not. The Supreme Court pointed out that if the advantage consists merely in facilitating the assessee's trading operations of enabling the management and contact of the assessee's business to be carried on more efficiently or more profitable leafing the fixed capital untouched, the expenditure would be no revenue account even though the advantage may accrue for an indefinite future. It, thus, laid down that test of enduring benefit is neither a certain of conclusive test and it could not be applied blindly or mechanically without regard to the particular facts an circumstances of a given case. Therefore, the old dictum that every enduring benefit will bring in a capital asset is no more true not it is available for blind and mechanical application. In this case we find that the payment having been made for the purpose of acquiring technical knowledge to erect a factory and thereafter to operate it and train the personnel of the assessee cannot be said to be a such a nature as to bring in an enduring advantage. On a consideration of the above we have come to the conclusion that the view taken by the Commissioner (Appeals) on all accounts is correct and reserves to be upheld. The Commissioner (Appeals) pointed out that the payment could be regarded as a payment made foe the extension of the existing business. This point was fairly conceded on behalf of the departmental representative because no arguments were addressed to us on that issue. On the contrary, the records show that those products were already being manufactured by the assessee. If this is the situation the payment made by the assessee to increase its profitability by applying a new method of manufacture of process of manufacture, could not be said to be on capital account. Nor is it the case of the revenue that the liability to pay this amount did not arise in this actuating year. Judged from these consideration and the provisions in the agreement, we have to the view that the assessee did not purchase any right in the patent right or technical know-how except that it acquired the right to use the information for the user of which it paid the fees. We, therefore, agree with the view taken by the Commissioner (Appeals) both in regard to the payment made to Tecnimont as well as to IWKA,West Germanyand uphold his view.

7. The next objection by the department is to the allowance of advertisement charges Rs. 10 lakhs. The assessee-company made a payment of Rs. 10 lakhs to All India Congress Committee for insertion of advertisement in the sovereign polished by the A. I. C. C. and claimed deduction of the same in computing its income. The ITO disallowed the claim on the ground that the payments were not in the nature of advertisement. Since donations to political parties were not to be allowed as deduction, he held that the amount was disallowable. Aggrieved by this disallowance, the assessee appealed to the Commissioner (Appeals) and produced before him proof of insertions of advertisements of the products of the assessee-company in various languages souvenirs brought out by the A. I. C. C. The assessee-company then claimed that the expenditure was really on advertisement and as there was no prohibition on the allowance of expenditure incurred for advertisement, the entreat amount should be allowed. Then the attention of the Commissioner (Appeals) was also invited to instructions issued by the CBDT vide their Circular No. 200 dated 28-6-1976 - See Taxmann's Direct Taxes Circulars, Vol. 1,1985 edn., page 386. The CBDT having laid down that the expenditure on advertisement in souvenirs should be allowed as deduction and since enough evidence was produced to show that advertisement were published in the souvenirs brought out by the A. I. C. C., the amount should be allowed as deduction. The Commissioner (Appeals) held that this was case which surely fall within the purview of the circular issued by the CBDT and as there was no dispute about the fact of incurring of expenditure the amount was wrongly disallowed. He also observed that the ITO erred in holding that this expenditure was in the nature of a donation in the guise of advertisement. It is against this order of the Commissioner (Appeals) that the department has filed this appeal contending that this expenditure should not have been allowed as a deduction. The controversy before us ultimately related to whether the amount paid was by way of donation to a political party or whether it was an amount paid for advertisement. The circular given by the CBDT in this connection on16-7-1976is very relevant and is reproduced below :

"1. Reference is invited to Board's Circular No. 200, dated28-6-1976by which it was clarified that no distinction need be drawn between expenditure on advertisement in souvenirs and other types of advertisement.

2. A question has been raised as to whether an assessee can resort to publicity in more that one souvenir published by the same institution/organisation. Souvenirs are one of the recognized media of publicity. A businessman can advertise in more than one newspaper or magazine and also in more than one issue of the same newspaper or magazine. Expenditure on such advertisement will qualify for deduction under section 37(3) read with rule 6B of the Income-tax Rules. Similarly, if advertisement have been released in more than one souvenir published by the same organisation, deduction in respect of such publicity will be admissible provided aforesaid conditions are satisfied." - Circular No. 203 - See Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., page 385. This circular issued by the CBDT makes it clear that advertisement inserted in souvenirs are recognized modes of publicity and that expenditure on such advertisement would qualify for deduction under section 37(3) of the Act, read with rule 6B of the Income-tax Rules, 1962. Here there is no dispute that the conditions of rule 6B were fully satisfied. In the circumstances there should be no objection for the allowance of this amount as a deduction. We agree with the finding given by the Commissioner (Appeals) that this amount was not a donation made to a political party in the guise of advertisement. A circular given by the CBDT is binding on the department and particularly those circulars which are beneficial to the assesses. This was the view expressed by the Supreme Court as early as in Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 later repeated in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 and very recently in K. P. Verghese v. ITO [1981] 131 ITR 597. In a still recent case the Madras High Court in the case of CIT v. Sundaram Finance (P.) Ltd. [1985] 154 ITR 564 held that amount spent towards publication of advertisement in several issues of a souvenir brought out by the Congress Party should be allowed as a deduction and it is no ground to say that because the souvenirs were related to a political party on the eve of elections they were in the nature of donation and ceased to be advertisement. The Madras High Court pointed out that thought the advertisement did not bring any direct or immediate benefit it was not impossible that as a result of a the advertisement. the advertiser did not secures new customer, a new business and increase its profitability. It also held that the circular issued by the CBDT referred to by the Commissioner (Appeals) was fully applicable and as per that circular the amount should have been allowed as an expenditure because that circular is binding on the revenue. Having regard to this we see no reason to reverse the finding given by the Commissioner (Appeals) which was in according with the circular issued by the CBDT. In fact the department should not have felt aggrieved by the decision of the Commissioner (Appeals).

8. The next objection was to the allowance of miscellaneous expenses of Rs. 4,777 consisting of Rs. 2,099 incurred by Shri S. K. Seth, a liaison officer of the assessee-company for company's work, Rs. 1,678 incurred by Shri Yogeadner Bhatt an employee of the assessee in connection with the follow up of the application for the visit of officials of the RBI to Kenya and Rs. 1,000 incurred by one Shri Dwarka Nath for the purpose of the company's business. The finding recorded by the Commissioner (Appeals) was that this expenditure was incurred by the employees of the company for the purpose of company's business and as full details were available and as the purpose was proved, there was no reason to disallow it. Though the department filed appeal against this allowance, nothing is pointed out to us to enable us to take a view different from the view expressed by the Commissioner (Appeals). In view of the categorical finding given by the Commissioner (Appeals) that this expenditure was for the purpose of the business we confirm his view on this point.

9. The next item is to the allowance of 50 per cent depreciation on machinery installed in the premises of J. K. Cotton Mfg. & Spg. Mills Ltd. and Plastic Products Ltd. The facts relating to the allowance of this depreciation were all mentioned by the Commissioner (Appeals) in his order and it is not necessary for us to repeat them except to state that the Commissioner (Appeals) has followed an order of the Tribunal in the assessee's own case and allowed 50 per cent of the depreciation. Since the order of the Tribunal alone was followed by the Commissioner (Appeals), we cannot take any exception to it. This ground is therefore rejected.

10. In the next ground objection is taken to the allowance of legal expenses and reatainership fees paid to tax consultants of Rs. 56,500. The details are :

Rs.

Retainership paid to Dr. R. C. Vaish 20,500

Retainership paid to Shri U. S. Dhusia 36,000

The Commissioner (Appeals) held that Dr. R. C. Vaish and Shri U. S. Dhusia were engaged as retainers of the assessee-company for the purpose of giving them advice on all matters including tax and the amount paid to them could not be considered as amount paid for any proceeding within the meaning of section 80VV of the Act and, therefore this fell outside the scope of section 80VV. He also found that whenever they appeared in any proceeding before any income-tax authority, they were separately paid fees. Though the departmental representative urged before us that this view was incorrect, it has not been shown to us that this amount was paid in respect of any particular proceeding before any income-tax authority. The disallowance was sought to be justified by the department applying the provisions of section 80VV, which is in the following terms :

"In computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under this Act, by way of tax, penalty or interest :

Provided that no deduction under this section shall, in any case, exceed in the aggregate five thousand rupees."

For this section to apply the amount must have been paid in respect of any proceeding before any income-tax authority or the Tribunal or any Court and that proceedings must relate to the determination of any liability under the Act and that liability must be either by way of tax penalty or interest. Since it is not shown that the amounts paid to Dr. R. C. Vaish and Shri U. S. Dhusia were in respect of any particular proceeding, the application of section 80VV is ruled out. In our view payments made by way of retainer fee cannot be said to be in respect of any particular proceeding before any income-tax authority. This is also the view expressed by several Benches of the Tribunal and we do not wish to burden this order with the citation of all those cases. We therefore express our agreement with the view expressed by the Commissioner (Appeals) and decline to interfere.

11. The next ground relates to the allowance of excise duty liability of Rs. 12,72,762. The facts relating to this claim are succinctly put by the Commissioner (Appeals) in his order and they are not in dispute. The assessee obtained method as a bye-product in the process of manufacture of synthetic staple fibre. The excise department levied excise duty on this bye-product at the rate of 50 paise per litre with effect from26-4-1972. This impost was made by the Rajasthan state Government. The total amount came to Rs. 12,72,762. The assessee-company challenged the validity of the levy through a writ petition filed in the Rajasthan High Court. The Rajasthan High Court allowed the assessee's writ petition on14-5-1976but the State Government filed a special leave petition in the Supreme Court. In the meantime the assessee claimed this sum as a liability by debiting in the accounts as excise duty payable on methol. The ITO disallowed the claim on the ground that the liability ceased to exist in law because of the decision of the Rajasthan High Court. The Supreme Court in the meantime admitted the special leave petition. Before the Commissioner (Appeals) it was claimed that with the admission of the special leave petition by the Supreme court, the finality of the High Court decision was shaken and, therefore, the liability continued to exist and in view of the decision of the Allahabad High Court in the case of J. K. Synthetics Ltd. v. O. S. Bajpai, ITO [1976] 105 ITR 864 the amount should be allowed as a deduction. The Commissioner (Appeals) by referring to the facts of that case before the Allahabad High Court held that that case fully applied to the facts of the case and following that decision allowed the assessee's claim. It is now pointed out before us that the facts in this case are no different from the facts obtaining in the case before the Allahabad High Court. The judgment of the Allahabad High Court was that notwithstanding an appeal filed by the assessee resisting the claim of the excise authorities, that fact by itself did not debar the assessee-company from claiming deduction on account of excise duty, which was being demanded from it for which the assessee-company made provision in the books of account under the mercantile system of accounting. The High Court pointed out that in case the litigation went against the assessee, the amount could be brought to tax under section 41(1) of the Act and in that view the department would not suffer any loss. Since this case is subject to the jurisdiction of the Allahabad High Court and since we find that the decision of the Allahabad High Court applied on all fours to the facts of this case, we hold that the view taken by the Commissioner (Appeals) is correct and we endorse it with the observation that in case the matter is decided by the Supreme Court against the assessee, the department should be able and free to bring this sum to tax under section 41(1).

12. The next item is against the question whether the cash allowance paid by the assessee-company to its employees would be regarded as part of salary or as perquisites for the purpose of disallowance under section 40A (5) of the Act. The total amount disallowed by the ITO and which is now in appeal before us is Rs. 1,47,727. The Commissioner (Appeals) following his earlier order for the assessment year 1975-76 held that the cash payments to the employees are not to be treated as perquisites but only as part of salary. He directed the ITO to recompute the perquisites in the light of this direction. The department is in appeal against this direction. But we find that this matter stands concluded by the order of the Tribunal for the immediately preceding assessment year in Income-tax Appeal No. 4548 of 1980 dated19-4-1985, which the Commissioner (Appeals) had only followed. We are also given to understand that the department did not file any reference application against this point. We, therefore, following with respect the order of the Tribunal hold that the view taken by the Commissioner (Appeals) is correct. We may also add that in the case of CIT v. Otis Elvators Ltd. a special leave petition filed in the Supreme Court on identical point was also dismissed. This point is, therefore, decided against the revenue and the order of the Commissioner (Appeals) is confirmed.

13. The next item is in regard to the allowance of development rebate in respect of plant and machinery installed in FEM division of Rs. 96,290. The assessee installed machinery of the value of Rs. 9,62,899 in FEM Division for the purpose of manufacture of fibres through chemical process. The assessee claimed development rebate on this machinery at 25 per cent but the ITO allowed only 15 per cent. There was, thus, a short allowance of Rs. 96,290. Aggrieved by this disallowance of development rebate the assessee applied to the Commissioner (Appeals) and submitted that the FEM Division manufactures machines, which are used for manufacturing synthetic fibres. According to section 33(1) (B) of the Act development rebate at 25 per cent is admissible on such machineries if they are installed after31-3-1970provided the machinery was installed for the purpose of manufacture or production of any one or more of the articles specified in the list in the Fifth Schedule of the Act. The claim of the assessee was that its manufacture fell within entry 4 of the Fifth Schedule which stands as under :

"(4) Industrial machinery specified under the heading '8 Industrial machinery', sub-heading 'A. Major items of specialized equipment used in specific industries', of the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951)."

The Commissioner (Appeals) after referring to the First Schedule to the Industries (Development and Regulation) Act, 1951 as well as second Schedule to the Wealth-tax Act, 1957 came to the conclusion that the assessee's claim was fully justified and that the manufacture of machinery to produce man made fibres was through chemical process and, therefore, the assessee was entitled to the development rebate at the rate of 25 per cent. The conclusion of the Commissioner (Appeals) is opposed by the department in this appeal. We have gone through the order of the Commissioner (Appeals) very carefully and we are in entire agreement with the view expressed by him. There is nothing brought to our notice by the department to show how and where the Commissioner (Appeals) had gone wrong. We, therefore, endorse the view taken by the Commissioner (Appeals) on this point also.

14. The next point is whether depreciation of 15 per cent is to be allowed on plant and machinery of synthetic staple fibres and nylon chord divisions. We find that this point is decided by the Tribunal in the assessee's own case in its favour and against the department in Income-tax Appeal No. 1921 of 1984 dated8-7-1975for the assessment year 1972-73. Respectfully following the view expressed by the Tribunal, we hold that the view taken by the Commissioner (Appeals) cannot be said to be incorrect. We, therefore, confirm it.

15. The next objection is whether the deficiency of section 80J of the Act relating to the assessment year 1973-74 and 1974-75 is to be set off or not. In those two years the profits of those two divisions was not sufficient to absorb the relief under section 80J though it was admissible. In the year under consideration as there was enough profit, the assessee claimed that the deficiency of the earlier years should be carried forward and set off. The ITO did not accept the assessee's claim mainly on the ground that for the assessment years 1973-74 and 1974-75 the assessments not having been finalised, the assessee would not be entitled to carry forward the deficiency but now we find that this point also has been decided by the Tribunal in the assessment year 1975-76 in Income-tax Appeal No. 4548 of 1980 dated 19-4-1985 in favour of the assessee and against the department. Respectfully following the view expressed by the Tribunal we hold that the Commissioner (Appeals) is right in his view.

16. In the next ground the decision of the Commissioner (Appeals) that FEM and Cement Division should be regarded as separate industrial undertakings and relief under section 80J should be computed in accordance with law is challenged. It is not necessary for us to recount all the facts here because now we are told the ITO had himself accepted the assessee's claim for the assessment year 1975-76 and treated them as separate new industrial undertakings. In this view taken by the Commissioner (Appeals). The view taken by the Commissioner (Appeals) is, therefore, confirmed.

17. The last point is about treating the security deposits received for cops of Rs. 1,80,000 as income of the assessee. We do not wish to recount again the facts relating to this point because here again we find that the Tribunal for the assessment year 1975-76 in the assessee's own case decided that these deposits are not in the nature of income. The is question of treating them as income does not, therefore, arise. What is more we are told that the reference application filed by the department was also rejected by the Tribunal in Reference Application No. 943 (Delhi) of 1984 dated15-2-1985. We, therefore, confirm the order of the Commissioner (Appeals) on this point also.

18. Before we part with this order, we would like to place on record our deep sense of appreciation at the very elaborate order passed by the Commissioner (Appeals) discussing each and very point thoroughly and lucidly, nor do we refrain from expressing our admirations at the able assistance provided to us by both the representatives who appeared before us.

19. In the result, the appeal filed by the revenue is dismissed.

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