Case: Alembic Chemicals Works Company Limited Vs. Commissioner of Income Tax, Gujarat

totally new and different type of plant and machinery. Shri Ramachandran is again right in the submission that the mere improvement in or updating of the fermentation process would not necessarily be inconsistent with the relevance and continuing utility of the existing infrastructure, machinery and plant of the assessee. 27. It would, in our opinion, be unrealistic to ignore the rapid advances in researches in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay, such as this as capital. The circumstance that the agreement insofar as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partiability, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. 28. In the present case, the principal reason that influenced the option of the High Court was that the initiation and exploitation of the new process brought in their wake a new venture requiring an altogether new plant. We are afraid, this view may not be justified. Clause (2), (4) and (6) of the agreement provide: (2) For and in consideration of the sub-cultures, design, flow sheet and written description to be furnished by Meiji to Alembic pursuant to paragraph (1) hereof, Alembic shall pay to Meiji in advance and in lump sum, such an amount as Meiji is able to collect Fifty thousand U. S. Dollars ($ 50, 000) net in Tokyo after deducting any taxes and charges to be imposed in Indian upon Meiji with respect to the said payment to Meiji. (4) Meiji will give advice, to the extent considered necessary by Meiji, on any difficulty Alembic may encounter in applying the sub-cultures and informations obtained by Alembic from Meiji to the large scale manufacture. The above provision shall be in force after Meijis receipt of the amount set forth in paragraph (2) hereof until the end of two (2) years from the effective date of this agreement. (6) Any of the sub-cultures and informations obtained by Alembic from Meiji shall be regarded as strictly confidential by Alembic and its personal and shall be used by Alembic only in its Penicillin G plant in India, and shall not be disclosed to any other person, firm or agency, governmental or private. Alembic shall take all reasonable steps to ensure that such sub-cultures and information will not be communicated. Alembic shall take all possible precautions against the escape from its premises of the strain obtained from Meiji or propagated therefrom. Alembic shall not apply for any patent to any country in relation to any of the sub-cultures and information obtained by Alembic from Meiji. 29. As notified earlier the Tribunal in the course of its order, held: Meiji agreed to give the designs etc., not only for a pilot plant but for the manufacture of penicillin according to Meijis process on commercial scale. The assessee has to put in a larger plant modelled on the pilot plant. 30. Having regard to the terms of clause (4) of the agreement, this conclusion is non-sequitur. 31. The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the assessees established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day to day business of the assessees established enterprise. 32. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure. Reference may also be made to the observations of this Court in CIT v. CIBA of India Ltd ((1968) 2 SCR 696 , 705 : AIR 1968 SC 1131 : 69 ITR 692) . 33. There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The `once for all payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. In a given case, the test of `enduring benefit might break down. In CIT v. Associated Cement Companies Ltd. (1988 Supp SCC 378 : 1988 SCC (Tax) 358), this Court said : (SCC p. 382, para 10)As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. v. CIT ((1980) 4 SCC 25 : 1980 SCC (Tax) 335 : (1980) 124 ITR 1 ), that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]It would, in our opinion, be unrealistic to ignore the rapid advances in researches in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay, such as this as capital. The circumstance that the agreement insofar as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partiability, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition31. The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the assessees established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day to day business of the assessees established enterprise32. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure. Reference may also be made to the observations of this Court in CIT v. CIBA of India Ltd ((1968) 2 SCR 696 , 705 : AIR 1968 SC 1131 : 69 ITR 692) 33. There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The `once for all payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. In a given case, the test of `enduring benefit might break down. In CIT v. Associated Cement Companies Ltd. (1988 Supp SCC 378 : 1988 SCC (Tax) 358), this Court said : (SCC p. 382, para 10)As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. v. CIT ((1980) 4 SCC 25 : 1980 SCC (Tax) 335 : (1980) 124 ITR 1 ), that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test34. In the result, for the forgoing reasons the appeal succeed and is allowed and the question of law referred to the High Court for its opinion in Income Tax Reference No. 78 of 1970 is answered in the affirmative and against the revenue. The judgment under appeal is set aside35. Likewise, the supplementary question of law raised in ITA No. 24 of 1971 before the High Court and now constituting the subject matter of the supplementary reference made by the Tribunal to this Court is answered in the negative and against revenue