IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION INCOME INCOME INCOME TAX REFERENCE NO. 1 OF 1992 TAX REFERENCE NO. 1 OF 1992 TAX REFERENCE NO. 1 OF 1992 M/s.Precision Bearings India Ltd. ... Applicant. V/s. The Commissioner of Income-tax, City-III, Bombay. ... Respondent. J.D.Mistry i/b. Mulla & Mulla & C.B.C. for the applicant. P.S.Sahadevan for the respondent. CORAM CORAM CORAM : V.C.DAGA AND J.P.DEVADHAR, JJ. : V.C.DAGA AND J.P.DEVADHAR, JJ. : V.C.DAGA AND J.P.DEVADHAR, JJ. DATED DATED DATED : 8th April, 2009. : 8th April, 2009. : 8th April, 2009. P.C. P.C. P.C. : : : ---- ---- ---- . The Income Tax Appellate Tribunal, Mumbai ("Tribunal" for short) has made this reference under section 256(1) of the Income Tax Act, 1061 at the instance of the Assessee as well as that of Revenue. The questions referred for the opinion of this Court are as under: At the instance of Assessee: (a) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the whole amount of technical know how fees of Rs.35,71,428 was not necessarily deductible in assessment year 1981-82, and the subsequent three instalments would be deductible with reference to the lates envisages in clauses (b), (c) and (d) of clause 12 of foreign collaboration agreement? - 2 - At the instance of Revenue: (b) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the purpose of computation of disallowance under Rule 6D of the Income Tax Rules, the entire amount incurred by the employee on travelling in a particular year should be taken into consideration together and not with reference to each individual trip made by the employee? (c) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the purpose of disallowance out of remuneration to the employee-directors, the provisions of section 40(c) of the Income-tax Act are applicable and not 40A(5) of the said Act? 2. The factual matrix reveals that the assessee is an Indian company engaged in the business of manufacture of bearings and allied products. Previous year relevant to this appeal was from 1st September, 1979 to 31st August, 1980. On 18th August, 1979, the assessee entered into an agreement with one German company namely "JAEGER Gmbh" (hereinafter referred to as "foreign company" for short). 3. The purpose of the agreement was to add to the existing range of products which were being already manufactured by the Assessee, viz., bearings and allied products. The foreign company was to provide technical know-how for the additional products. The agreement envisaged supply of - 3 - information relating to the developments and improvements effected by the foreign company in the process of manufacture of goods during the period during agreement was to operate i.e. eight years. The agreement also provided for training to the persons deputed by the Assessee at the works of the foreign company in West Germany. Thus, under the agreement, the assessee was to receive initial know-how together with the know-how for modernisation by replacement or otherwise of some plant and machinery which was being used in the manufacture of bearings. 4. The Assessee under the above agreement was prohibited from passing on the know-how to any other party in India unless it was necessary to do so, but subject to the terms agreed upon between the Assessee and the foreign company. The total payment due was foreign exchange equivalent of Rs.35,71,428/-. It was a fixed sum though payable in four equal instalments. 5. The Income-tax Officer held that since it was a lumpsum payment and it was for acquiring technical know-how, it resulted in an enduring benefit to the Assessee as such payment was capital in nature. - 4 - 6. The Commissioner (Appeals) in appellate order took note of the above mentioned facts and relying upon number of decisions including that of the Bombay High Court in C.I.T. v. Tata Engineering C.I.T. v. Tata Engineering C.I.T. v. Tata Engineering & Locomotive Co.Ltd. Locomotive Co.Ltd. Locomotive Co.Ltd., 123 ITR 538 ruled that the payment was in nature of revenue expenditure and hence deductible in computation of total income. 7. The matter was carried to the Tribunal at the instance of the Revenue challenging correctness of the view taken by the Commissioner (Appeals). According to the Revenue, an amount of Rs.35,71,428/- was payable in four equal instalments on the terms and conditions mentioned in clause 12 of the agreement dated 18th August, 1979. Consequently, it was not open for the Assessee to claim whole amount spent on technical know-how fees in the assessment year 1981-82. 8. The Tribunal, after having heard parties, recorded its finding in the following words: " ..... Therefore, the decision, in principle, would be that the second instalment would be deductible with reference to the date on which transfer of initial data etc. took place and if that date falls in the previous year relevant to this year, it would be deductible in this year. The third and fourth instalments would be deductible with reference to the date of commencement of commercial production and if that date falls within the previous year relevant to - 5 - this appeal, then both these instalments, viz. third and fourth instalments would be deductible in this very year. This aspect of the matter is restored to the file of the assessing officer for re-adjudication on the lines indicated above, after giving a reasonable opportunity of being heard to the assessee. The department’s this ground of appeal is treated as partly accepted." The Tribunal at the instance of the parties to the above has referred questions of law for the opinion of this Court as extracted in the opening part of this order. 9. The learned counsel for the rival parties were heard. Learned counsel appearing for the Assessee contended that the Assessee is following commercial system of accounting and the agreement for provision of know-how specifically mentions about the payment to be made by the Assessee for acquiring know-how, as such Assessee shall be entitled to claim the same in lumpsum in the assessment year in which the liability was incurred. Reliance is placed on the judgment of this Court in the case of C.I.T. v. C.I.T. v. C.I.T. v. Buckau Buckau Buckau Wolf New India Engg. Works Ltd. Wolf New India Engg. Works Ltd. Wolf New India Engg. Works Ltd., (1986) 157 ITR 751. 10. In C.I.T. v. Buckau Wolf New India Engg. C.I.T. v. Buckau Wolf New India Engg. C.I.T. v. Buckau Wolf New India Engg. Works Works Works Ltd. Ltd. Ltd., identical question was answered in favour of the assessee. We have perused the said judgment - 6 - and for the reasons recorded therein it would follow that the above question (a) would have to be answered in affirmative i.e. in favour of the Assessee and against the Revenue. 11. So far as question (b) referred at the instance of Revenue is concerned, the same is already considered and answered by this Court in C.I.T. v. C.I.T. v. C.I.T. v. Aorow Aorow Aorow India India India Limited Limited Limited, 229 ITR 325 (Bom). In this view of the matter, for the reasons stated in the said judgment, question (b) is answered in negative i.e. in favour of the Revenue and against the Assessee. 12. So far as question (c) referred at the instance of the Revenue is concerned, the same is also covered by the judgment of this Court C.I.T. v. C.I.T. v. C.I.T. v. HICO HICO HICO Products Pvt.Ltd.(No.1) Products Pvt.Ltd.(No.1) Products Pvt.Ltd.(No.1), (1993) 201 ITR 567. Consequently for the reasons stated therein, said question is answered in affirmative i.e. in favour of the Assessee and against the Revenue. 13. Reference stands disposed of. (J.P.DEVADHAR, (J.P.DEVADHAR, (J.P.DEVADHAR, J.) J.) J.) (V.C.DAGA (V.C.DAGA (V.C.DAGA J.) J.) J.)