vil Appeal No 1163 NT of 1974
From the Judgment and Order dated 2511
1971 of the Allahabad High Court in Income Tax Reference No 310 of 1968 SC Manchanda MN Tandon and Miss A Subhashini for the Appellant
BP Singh and Ranjit Kumar for the Respondent
The Judgment of the Court was delivered by SABYASACHI MUKHARJI J
This is an appeal from the judgment and order of the High Court of Allahabad dated 25th November 1971
The Income Tax Appellate Tribunal had referred to the High Court the following question for its opinion Whether on the facts and in the circumstances of the case the expenditure of Rs50000 was a capital expenditure which could not be allowed as a deduction under section 102xv of the Income tax Act 1922 The assessee carried on the business of manufacture and sale of woolen goods cotton textiles and hides and leather products
The activity of tanning hides and manufacturing leather products was carried on under the name and style of Cooper Allen and North West Tannery branches
For the as sessment year 1959 60 under the Income tax Act the rele vant accounting of which being the calender year ending on 31st December 1958 the assessee had claimed a deduction of Rs50000 paid to Messrs Textile  General Supplies Private Ltd Bombay hereinafter referred to as Textile  General Supplies
The assessee s claim was made on the basis that the assessee was bound under an agreement with Messrs Charles Walker  Co London to pay that amount to Textile General Supplies for meeting the initial expenditure for establishing it as distributor of the assessee s products
The Income tax Officer rejected the claim and the Appellate Assistant Commissioner upheld that decision
The assessee went up in appeal before the Income tax Appellate Tribunal
The Tribunal also rejected the claim of the assessee
At the instance of the 136 assessee the Tribunal made a reference on the aforesaid question to the High Court
The question is whether the assessee was entitled to claim deduction in the computation of its profits and gains of business in respect of the expenditure in question not being in the nature of capital expenditure laid out or expended wholly or exclusively for the purpose of such business
In other words on the background of the facts in controversy in this case whether it was revenue expenditure or capital expenditure
This question has been discussed in the various deci sions
It is settled that the question must be viewed from the practical point of view
There are deluge of cases and no principle can be laid out with substantial accuracy which will be applicable in all the cases
The answer to the question must depend on the facts and circumstances of each case on the application of the principles of law as laid down by the courts
The agreement in question in this case between the assessee with Charles Walker stipulated that Charles Walker would permit the use by the assessee of a number of registered trade marks specified in the agreement and further disclose and make known to the approved officers of the assessee the technique practices and application of specialised tanning processes
Besides providing for the provision of technical supervision by Charles Walker and payment by way of salary travelling expenses and mainte nance to the personnel sent out by it to India the agree ment also provided that in the event of liberalisation of imports Charles Walker would limit its export to India of certain products
The assessee undertook to pay to Charles Walker technical fees calculated at 5 on the selling price of the products by the processes disclose to it
Paragraph 7 of the agreement was to the following offect The Second participant the assessee agrees to appoint Textile and General Supplies Pri vate Ltd Army and Navy Buildings Mahatma Gandhi Road Bombay 1 India a nominee of the first participant CharLes Walker as distrib utors of the second participant for the sate of industrial leather manufactured by the second participant in India for the period of this agreement at a discount of 15 fifteen per cent on the prices at which Industrial Leather covered by this agreement are sold to textile mills and other consumers
In addition the second participant will pay Rs50000 Rs Fifty thousand only to the distributors for 137 meeting the initial expenses of establishing the distributoship of the second participant on the express understanding that the first participant will not part with his interest in Textile  General Supplies Private Ltd with out the prior approval in writing of the second participant
 Seven years was the period of the agreement as agreed
It is clear from paragraph 7 as aforesaid read in the background of the entire facts that the assessee was obliged to appoint Textile  General Supplies nominee of Charles Walker as its distributors for the sale of industrial leather manufactured by it in India
The assessee was obliged by the aforesaid agreement to pay Rs50000 to the distributorship
An agreement was entered into by the assessee with Textile  General Supplies in which after referring to the agreement with Charles Walkar it was stipulated that the distributors would receive a discount of 15 of the sale price fixed by the assessee and that the agreement would extend for the period of seven years
Significantly no reference was made to the obligation of the assessee to pay Rs50000 to the distributors a condition which was men tioned in the agreement with Charles Walker alone
The obligation to pay Rs50000 to the distributors was one of the conditions subject to which the assessee became entitled to the use of the registered trade marks and to the disclo sure of the technical practices and application of the specialised processes to be supplied by Charles Walker
This clause regarding appointment contained in paragraph 7 formed part and integral part of the agreement and was a considera tion for the receipt of the benefit from Charles Walker under the agreement
It was a condition to get the technical knowledge of the know how that their nominee should be appointed as distribu tor and for the setting up of the distributor s business rupees fifty thousand was required to be paid
This was in essence an integral part of the bargain for the acquisition of the technical knowledge to have this particular distribu tor
Numerous decisions have dealt with this question
In British Sugar Manufacturers Ltd vs Harris Inspector of Taxes the Court of Appeal in England dealt with this question and Romer LJ at page 108 of the report observed in dealing with the question which was similar to the present one that the real question is is the 138 payment that has to be made by the trader under the contract in question a mere division of profits with another party or it is a payment to the other party the amount of which is ascertained by reference to the profits The Lord Justice observed that it was a difficult question
In that case the Lord Justice held that the payment was made to earn the profit
It was condition precedent to the acquisition of the know how that the payment had to be made for installation of the set up of the distribution arrangement
Rowlatt J in the case of Countess Warwick Steampship Co Ltd vs Ogg 1924 2 KB 292 at 298 observed that it is very difficult to lay down any general rule which is both sufficiently accurate and sufficiently exhaustive to cover all or even a great number of possible cases
Only broad tests could be laid down
Some of such tests were laid down by this Court in Assam Bengal Cement Co Ltd vs Commissioner of Income Tax West Bengal This Court discussed the broad principles at page 45 of the report
It is not neces sary to reiterate all these principles but one of the tests was that the aim and object of the expenditure was one of the guiding factors
The aim and object of incurring the expenditure in this case was the acquisition of the know how
This Court again in the case of Commissioner of Income Tax Bombay City Iv
Ciba of India Ltd and vice versa discussed the principles application in determin ing whether the expenditure in such circumstances was a capital or a revenue in nature
See also Travancore Sugar and Chemicals Ltd vs Commissioner of Income Tax Kerala  Commissioner of Income Tax West Bengal H vs Coal Shipments P Ltd  Empire Jute Co Ltd vs Commissioner of Income Tax  This Court observed what was material to consider was the nature and the advantage in obtaining the asset in a commercial sense
Also see LH Sugar Factory and Oil Mills P Ltd vs Com missioner of Income Tax UP These principles have been summarised in the Commentary of Kanga and Palkhivala s Income Tax Seventh Edition Volume 1 page 484 to 488
But the cases referred emphasise that no test of universal application can be laid down
The question posed in this appeal has to be decided bearing the aforesaid principles in mind
It is clear that Rs50000 was really part of the price paid by the assessee to obtain the know how
It is clear that pursuant to para graph 7 the assessee was bound to appoint Textile and General Supplies nominee of Charles Walker as its distrib utor for the 139 sale of leather manufactured by it in India
Contemporane ously an agreement was entered into by the assessee with Textile  General Supplies in which after referring to the agreement with Charles Walker it was stipulated that the distributors would receive a discount of 15 of the sale price fixed by the assessee and that the agreement would extend for a period of seven years
Significantly no refer ence was made to the obligation of the assessee to pay Rs50000 to the distributors a condition which was in the agreement with Charles Walker alone
It is clear that paragraph 7 referred to hereinbefore was an integral part of the agreement with Charles Walker and was a part of the consideration for the receipt of the benefit
It is not possible to find out the reasons which persuaded Charles Walker to insist upon the appointment of Textile  General Supplies as distributors of the assessee
It was a necessary condition of the agreement with Charles Walker
It was perhaps done to protect the technical know how which Charles Walker was parting so that the distribu tors would be a nominee of Charles Walker
Having regard to the nature of the agreement and having regard to the facts that the organisation set up under the distributorship agreement was to endure for seven years and upon the expiry of the period the assessee had no relation ship with the organisation and that the period of agreement between the assessee and distributors was contemporaneous with the agreement between the assessee and Charles Walker under which the assessee became entitled to use the regis tered trade marks it must be considered to be a revenue expenditure
Considerable emphasis has been laid by the revenue on the facts that in paragraph 7 of the agreement with Charles Walker it was mentioned that Rs 50000 would be paid to the distributors for meeting the initial ex penses
We are of the opinion that in the facts and circum stances of the case this was a revenue expenditure because it was part of the price for the acquisition of technical know how and the condition of the appointment was a stipula tion mentioned by Charles Walker
In the premises we are of the opinion that the High Court was right in the view it took
The appeal therefore fails and is accordingly dismissed with costs
APJ Appeal dis missed


Summary:
The assessee company entered into an agreement with Ms Charles Walker and Company London which inter alia stipu lated that the latter would permit the use by the assessee of a number of registered trade marks specified in the agreement and disclose to the approved officers of the assessee the technique practices and application of specia lised tanning processes
Paragraph 7 of the agreement pro vided that the assessee would appoint Textile and General Supplies nominee of the Charles Walker as its distributors for the sale of industrial leather manufactured by it in India and the assessee would pay Rs50000 to the distribu tors for meeting the initial expenses of establishing the distributorship
This agreement was to be in force for a period of seven years
Simultaneously another agreement was entered into between the assessee and Textile and General Supplies for a period of seven years but no reference was made therein to the obligation of the assessee to pay Rs50000 to the distributors
For the assessment year 1959 60 the assessee claimed the payment of Rs50000 to Textile and General Supplies as a deduction permissible under section 102XV of the Income Tax Act 1922 which was rejected by the Income Tax Officer Appellate Assistant Commissioner and the Tribunal on the ground that the said payment was in the nature of a capital expenditure
In the Reference the High Court allowed the claim of the assessee holding that the payment in question was a revenue expenditure
Dismissing the Appeal of the Revenue 134 HELD 1
The real question is whether the payment that had been made by the assessee under the contract in question is a mere division of profits with another party or is it a payment to the other party the amount of which is ascer tained by reference to the profits
138A B 2
No test of Universal application can be laid down
The aim and object of the expenditure was one of the guiding factors
The aim and object of incurring the expenditure in this case was the acquisition of the know how
Rs50000 was really part of the price paid by the assessee to obtain the know how
Pursuant to Paragraph 7 of the said agreement the assessee was bound to appoint Textile and General Supplies nominee of Charles Walker as its distributor for the sale of leather manufactured by it in India
Paragraph 7 was an integral part of the agreement with Charles Walker and was a part of the consideration for the receipt of the benefit
It was necessary condition of the agreement with Charles Walker to appoint Textile and General Supplies as distributors of the assessee
It was perhaps done to protect the technical know how which Charles Walker was parting so that the dis tributors would be a nominee of Charles Walker
138D H 139C D 3
Having regard to the nature of the agreement and having regard to the facts that the organisational set up under the distributorship agreement was to endure for seven years and upon the expiry of the period the assessee had no relationship with the organisation and that the period of agreement between the assessee and the distributors was contemporaneous with the agreement between the assessee and Charles Walker under which the assessee became entitled to use the registered trade marks it must be considered to be a revenue expenditure because itwas part of the price for the acquisition of technical know how and the condition of appointment was a stipulation mentioned by Charles Walker
139D F British Sugar Manufacturers Ltd vs Harris Inspector of Taxes  Countess Warwick Steampship Co Ltd vs Ogg 1924 2 KB 292 at 298 Assam Bengal Cement Co Ltd vs Commissioner of Income Tax West Bengal  Commissioner of Income Tax Bombay City Iv
Ciba of India Ltd and vice versa  Travancore Sugar and Chemicals Ltd vs Commissioner of IncomeTax Kerala  Commissioner of Income Tax West Bengal H vs Coal Shipments P Ltd  Empire Jute Co Ltd vs Commissioner of Income Tax   LH Sugar Factory and Oil Mills P Ltd vs Commissioner of Income Tax UP and Commentry of Kanga and Palkhivala s Income Tax Seventh Edition Volume 1 page 484 to 488 referred to 135