1. N.V. BALASUBRAMANIAN, J.---In the batch of tax cases, the common question involved is with regard to the allowability of certain sums paid by the assessee under the collaboration agreement, dated December 10, 1975, as Revenue expenditure. The assessment years with which we are concerned in the above tax cases are 1977-78, 1978-79, 1980-81 and 1981-82. Since there is no dispute with regard to the facts and the facts are common, we refer to the facts in T.C. No.1465 of 1986, and it is unnecessary to repeat the facts in all other tax cases.
2. The assessee during the assessm ent year 1977-78 claimed a deduction of a sum of Rs.21,490 paid as royalty to India Radiators Ltd., for providing technical know-how for the manufacture of automobile air-cleaners. The agreement,was for a period of five years. The assessee under the agreement was obliged to pay a royalty of Rs.2 per air-cleaner manufactured with the assistance received from India Radiators Ltd. The claim of the assessee was that the sum paid was Revenue expenditure and allowable in the computation of business income. The Income-tax Officer, however, rejected the claim of the assessee on the ground that the assessee obtained an enduring benefit and, hence, the amount paid by way of royalty cannot be regarded as Revenue expenditure.
3. The assessee went on appeal before the Commissioner of Income-tax (Appeals) against the view of the Income-tax Officer that the amount should be treated as capital expenditure. The Commissioner (Appeals) held that the period of five years cannot be regard as a long one to confer an enduring benefit on the assessee and that the designs and drawings furnished by India Radiators Ltd. May not be of much use after the period of five years and in this view of the matter, he held that the amount paid as royalty should be regarded as Revenue expenditure.
4. The Revenue carried the matter on appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal perused the terms of the agreement and came to the conclusion that the payment made by the assessee was towards the licence to use the technical information received by the assessee from India Radiators Ltd. And-there was no outright purchase of the drawings and, as such, the amount paid should be regarded as Revenue expenditure and dismissed the appeal preferred by the Revenue.
5. The Revenue has challenged the order of the Appellate Tribunal and on the basis of the directions of this Court, the Appellate Tribunal has refekred the following questions of law in T.C. No.1465 of 1986 and T.C. No. 1536 of 1986 for our consideration: Tax Case No.1465 of 1986: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs.21,490 paid to India Radiators Ltd. Under the collaboration agreement, dated December 10, 1975, should be allowed as a Revenue expenditure?"
6. Tax Case No.1536 of 1986: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the technical know-how fees paid to India Radiators Ltd. Is an admissible deduction while computing the income of the assessee?"
7. In Tax Cases Nos.982 and 983 of 1986, the Tribunal has referred the following common question of law under section 256(1) of the Income Tax Act, 1961, for our consideration: "Whether, on the 'facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the technical know-how fees paid to India Radiators Ltd. Is an admissible deduction while computing the income of the assessee?"
8. Mr. C.V. Kajan, learned counsel for the Revenue, forcibly submitted that the Tribunal was not correct in holding that the amount paid to India Radiators Ltd. Should be allowed as Revenue expenditure as the assessee had obtained an enduring benefit by virtue of the technical collaboration agreement. He submitted that the knowledge obtained by the assessee would enure even after the period of the agreement and, therefore, the amount was rightly disallowed by the Income-tax Officer as capital expenditure.
9. Mr. Sampathkumar, learned counsel for the assessee, on the other hand, submitted that the Tribunal has come to the correct conclusion in holding that the amount was allowable as Revenue expenditure. He submitted that the Tribunal, on a perusal of the terms of the agreement, came to the conclusion that there was no proprietary interest over the know-how supplied by India Radiators Ltd. And the assessee was given only a licence to use the knowledge during the period of the agreement and, therefore, there is no case to interfere with the-order of the Appellate Tribunal.
10. We have carefully considered the submissions of learned counsel for the parties. It is clear that the agreement was only for a period of five years and it cannot be said that the assessee had obtained an enduring benefit by virtue of the agreement and the period of five years cannot be regarded as a long period to confer an enduring benefit on the assessee. Further, the assessee obtained the technical knowledge for the manufacture of air-cleaners in the automobile field and it is a common knowledge that fast changes are taking place in the automobile field and the rapid technological change in the field of automobile is evident from the new types of vehicles coming to the market. The Appellate Tribunal also perused the terms of the agreement and gave its finding that the assessee was given a licence to use the technical assistance received from India Radiators Ltd. Though the Appellate Tribunal found that under the collaboration agreement there is no specific prohibition against the use of the knowledge obtained by virtue of the agreement even after the termination of the agreement, clauses 22 and .23 of the agreement which were relied upon the Tribunal show that the assessee has no proprietary interest over the drawings or the know-how obtained under the collaboration agreement. We are df the view that the payment made by the assessee was for the production of the articles manufactured by the assessee and it cannot be regarded as a payment for acquisition of capital "assets. The view of the Appellate Tribunal that the payment was made for the use of the capital assets during the period of five years appears to be reasonable and there is no warrant to differ from the finding of the Appellate Tribunal that the payment was made for the use of the knowledge during the period of the agreement.
11. In Alembic Chemical Works Co. Ltd..v. CIT (1989) 177 ITR 377, the Supreme Court has held that it would be unrealistic to ignore the rapid advances in the medical field 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. We are of the view that the view expressed by the Supreme Court with reference to the medical field would equally apply to the automobile field and it is not possible to attribute a degree of endurability and permanence to the technical knowledge obtained by the assessee in the automobile field. The Supreme Court further held that there is no single definitive criterion which by itself is determinative whether a particular outlay is capital or Revenue and the "once for all" payment test is also inconclusive and what is relevant is the purpose of the outlay and its intended object and effect considered in a common sense way having regard to the business realities. In the light of the tests laid down by the Supreme Court, we are of the view that the purpose of the outlay in the instant case was for the use of the technical know-how during the period of the agreement, and the object of the agreement was the better production of the product and when the business reality in the automobile field is taken into account, the payment made by the assessee cannot be regarded as capital expenditure as it cannot be said that the assessee had acquired capital assets by virtue of the payment under the agreement. The agreement, as found by the Tribunal, clearly shows that the assessee had the licence benefit to use the technical knowledge during the period of the agreement and, therefore, it is not possible to say that the assessee had obtained an enduring benefit by virtue of the payment made to the collaborator.
12. This Court in the case of CIT v. Aquapump Industries (1996) 218 ITR 427, in a more or less similar factual situation, held that what is relevant is the purpose of the expenditure and its intended object and effect, considered in a common sense way having regard to business realities. This Court also held that where the expenditure although enduring in character has its impact on the running of the business, there can be no doubt that it is Revenue expenditure. We have seen that the assessee entered into the agreement for the better production of the product and, therefore, the impact of the technical knowledge was to run the business more profitably and it cannot be said that the assessee had entered into the , agreement with the object of setting up a new plant or setting up; a new. Business. The decision of this Court in Aquapump Industries' case (1996) 218 ITR 427, would also apply to the facts of the case.
13. In Jonas Woodhead & Sons (India) Ltd. v. CIT (1997) 224 ITR 342, the Supreme Court has considered the question and laid down the test when the expenditure can be regarded as capital expenditure or Held, that the assessee did not receive the asset as a consequence of a dissolution of another firm of which the assessee was a partner. The assets were received by the partners as individuals, who thereafter made that asset the asset of the new firm. The Appellate Tribunal was right in holding that the capital gain on the sale of the asset should be computed with reference to the cost, which was to be determined under section 48 of the Act as Rs.8,00,000.
14. Held also that the law applicable is that in, force on the date of commencement of the assessment year. Hence, the Tribunal was right in disallowing expenditure on advertising for the assessment year 1979-80 under subsection (3A) of section 37 although the subsection' came into force with effect from April 1, 1979 after the expenditure had been incurred.
15. CIT v. Bhupenddr Singh Atwai (1983) 140 ITR 928 (Cal.) ref.
16. P.P.S. Janarthana Raja for Messrs Subbaraya A iyar, Padmanabhan and Ramamani for the Assessee. C.V. Rajan for the Commissioner.
17. R. JAYASIMHA BABU, J.---Two questions have been referred to us at the instance of the assessee arising out of the assessm ent for the year 1979-80. At the instance of the Revenue a question which is interconnected with the questions raised by the assessee has also been referred.
18. The questions referred at the instance of the assessee are: "(1) Whether, on the facts and in the circumstances 'of the case, the Tribunal was right in holding that in computing the capital gains arising to the assessee by sale of machinery in question the cost of acquisition should be the revalued amount in the hands of the new firm ,viz., Rs.8 lakhs, and not the original cost in the hands of the predecessor-firm, viz., Rs.10,68,017?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the disallowance of advertisement expenditure under section 37(3A) of the Income-tax Act?"
19. The question referred at the instance of the Revenue is: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the capital gain on the sale of the asset should be computed with reference to the cost, which is to be determined under section 48 of the Income Tax Act, 1961, Rs.8,00,000 and not with reference to the written down value of that asset under section 50(1) of that Act?"
20. The question as to what yeas the cost of acquisition of the asset in respect of which the assessee had obtained capital gains, is the real issue in all the questions referred to us at the instance of the Revenue as also in the first question referred at the instance of the assessee.
21. The undisputed facts relevant for the purposes of this case are that the assessee-firm which consists of two partners was formed on June 16,\ 1977. It consisted of two partners who had brought in the bottling machinery in respect of which the firm received a capital gain, as their contribution to the partnership firm. In the books of the firm these assets were valued at Rs. 8 lakhs.
22. These two partners had received the bottling machinery in the distribution of the assets of another firm known as P.V.S.K. Palaniappa Nadar & Sons in which they were partners and which firm was dissolved with effect from April 1, 1977. That deed of dissolution had been amended on April 7, 1977, to record that the assets of the Madras branch of that firm then known as Kali Aerated Water Works was taken over by Sakthivel and Singaravel who were partners of that firm,. And who subsequently formed a new firm which is the assessee herein. The assessee thus did not receive the asset as a consequence of a dissolution of another firm of which the assessee was a partner. The assets were received by the partners as individuals, who thereafter made that asset the asset of the new partnership firm constituted under the deed, dated Jane 16, 1977. One of the items that was thus brought into the new firm was a bottling machine of German origin, which was shown in the assessee's books of account at the revaluel figure of Rs.8 lakhs, although that machine had been acquired by the firm in which the partners of the assessee had been partners at a cost of Rs.10,68,017. The dissolved firm, at the time of dissolution of the firm had been, allowed, depreciation on the machine, and the written down value of the bottling machine was Rs.3,16,599 as on the date of dissolution.
23. The assessee claimed that the original cost of Acquisition by the dissolved firm was required to be adopted for the purpose of calculating capital gain while it was the case of the Revenue that the written down value as on the date of dissolution of the firm should be adopted. The Tribunal has negatived the claim so made by the Revenue as also by the assessee, and has held that the capital gains is to be computed in accordancewithsection48oftheAct. Learned counsel for the Revenue submitted that the capital gains has to be calculated in accordance with section 50 of the Act as depreciation had been claimed and allowed after the asset was acquired by the dissolved firm. This argument is clearly untenable, as section 50 of the Act will only apply to cases where the depreciation had been obtained by "the assessee". Admittedly, the assessee had not obtained any depreciation after the asset became an asset of the partnership firm constituted under the deed, dated June 16, 1977. In this context reference may usefully be made to the decision of the Calcutta High Court in the case of CIT v, Bhupender Singh Atwal (1983) 140 ITR 928, delivered by Sabyasachi Mukharji, J., (as he then was), who, speaking for the Bench, held that after an asset has become the property of a new firm the cost of acquisition by the firm is to be taken into account for computing the capital gains, and not the written down value of the asset on the date of dissolution of the old firm. Section 50 would only apply to the cases where the "assessee" had obtained the depreciation.
24. Having regard to the statutory provision, namely, section 50 of the Act, the answer to the question referred at the instance of the. Revenue must be in the affirmative.
25. As regards the related question raised by the assessee, the answer to that question also has to be in the affirmative. The Tribunal was right in holding that section 48 of the Act is to be applied and in rejecting the assessee's contention under section 49(1)(iii)(b) of the Act. The facts set out above clearly show that the assessee-firm did not receive the asset at .The dissolution of the old firm but it had been received by the erstwhile partners of the old firm, who thereafter revalued the assets of the new firm which they constituted under a deed, dated June 16, 1977. Section 49(1)(iii)(b) of the Act would apply only to cases where the capital asset became the property of the assessee on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons. The capital assets, therefore, should have become the property of the assessee as the direct consequence of the distribution of such assets, on the dissolution of the firm. The capital asset in this case did not become the property of the assessee as a consequence of the distribution of -assets on the dissolution of the old firm. It became the property of the assessee only by reason of that asset having been made the property of the new firm, by the two partners who owned that asset after the dissolution of the old firm, and who contributed that asset to the capital of the new firm.
26. The Tribunal was right in holding that the mode of computation of the income chargeable under the head "Capital gain" of this asset was required to be calculated in accordance with section 48 of the Act, we do not find any error in the order of the Tribunal. The first question referred to us at the instance of the assessee must be answered in the affirmative.
27. The question which remains for our consideration is the one relating to the disallowance of advertisement expenditure under section 37(3A) of the Act. The Tribunal disallowed the expenditure. The Commissioner had disallowed the same on the ground that section 37(3A) of the Act came into force with effect from April 1, 1979, though after the close of the relevant previous year. It is the.Law applicable on the date of commencement of the assessment year that would govern irrespective of as to when the expenditure had been incurred, is a proposition of law which is too well-settled to require any further detailed consideration. Accordingly, we hold that the Tribunal was right in upholding the disallowance of advertisement expenditure.
28. All the questions rferred for our consideration, are, therefore, answered in the affirmative. Having regard to the circumstances of the case, the parties shall bear their respective costs. . revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.