JUDGMENT
DIVAN C.J. – In this case, at the instance of the revenue, the following four questions have been referred to us for our opinion :
“(1) Whether, on the facts and in the circumstances of the case, the entire expenditure incurred on the foreign tours of Mr. Rohit Chinubhai and Mr. H. P. Gupta was allowable as revenue expenditure ?
(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to deprecation and development rebate on Rs. 1,08,000 in the machinery account and depreciation on Rs. 60,000 in the building account ?
(3) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 24,000 incurred on testing formula is allowable as revenue expenditure ?
(4) Whether, on the facts and in the circumstances of the case, roads form part of the plant and whether the assessee is entitled to claim deprecation on the amount of Rs. 38,180 ?
The facts leading to this reference are as follows :
The assessment year under reference is 1967-68, the previous year being the financial year ending on March 31, 1967. The assessee is a private limited company. It entered into a collaboration agreement with M/s. McGaw Laboratories of the United Sates of America. Under the said agreement, the assessee-company was entitled to market its products in India and two foreign countries, namely, Ceylon and Pakistan. The assessee-company however, wanted to export its products to other courtiers, mainly in the middle east and far east. It was, therefore, decided to depute Mr. Rohit Chinubhai to negotiate changes in the collaboration agreement so as to enable the assessee-company to market its products is the middle east and the far east and the far east. The resolution to that effect was passed by the board of directors of the assessee-company at its meeting held on June 22, 1966. The assessee-company also decided to depute Mr. H. P. Gupta its laboratory controller, to the collaborators, associates, M/s. Dade Reagents is a division of the American Hospital Supply Corporation. The assessee company was already manufacturing blood transfusion equipment in the form of A.C.D. solution bottles and blood administration sets. In order to complete the range of the said products the assessee-company thought it necessary to produce blood plasma and reagents which are ancillary products of A.C.D. Bottles and blood equipments. Mr. Rohit Chinubhai was, therefore, requested to hold discussion with M/s. Dade Reagents to finalise various management and technical details. It was under these circumstances that the assessee-company incurred expenditure of foreign tour undertaken by Rohit Chinubhai and H. P. Gupta. The expenditure of Rs. 23,837 was incurred for the foreign tour of Rohit Chinubhai and Rs. 15,778 for the foreign tour of H. P. Gupta. In the course of the assessment for the assessment year under reference, the assessee-company claimed that the said expenditure was revenue in nature. The ITO, however, rejected the claim made by the assessee-company holding that the said expenditure was capital in nature.
The assessee-company has paid Rs. 1,92,000 by way of technical knowhow fees to M/s. McGaw Laboratories under the collaboration agreement. The technical know-how consisted of secret formula, processes, designs, drawings specifications, etc. The drawings and designs were necessary for the construction of the assessee-companys factory building and installation of plant. The assessee-company debited 10% of the value of technical know-how to the profit and loss account and the remaining amount of Rs. 1,72,800 was allocated to the machinery account and the building account, i.e., Rs. 1,06,628 to the machinery account and Rs. 66,178 to the building account. The ITO addressed a letter dated October 23, 1971, requiring the assessee-company to furnish details regarding the allocation of Rs. 1,92,000 to various items were grouped under three heads, namely revenue expenditure charged to profit and loss account, the machinery account and the building account. In reply to this letter, it was stated by the assessee-company that the allocation was made under three heads roughly on the basis of book value. The ITO, however, found that there was no rational basis for the allocation made by the assessee-company. He further found that the value of the raw materials included in technical know-how had no relation to the value of raw materials imported or to the capital outlay on the building and machinery. According to the ITO, the allocation made by the assessee-company was not supported by any evidence. He, therefore, disallowed the whole of the amount of Rs. 1,92,000 paid by way of technical know-how fees to the foreign collaborator. He, therefore, did not allow the depreciation and development rebate on the amounts allocated to the building and machinery account.
The assessee-company had also incurred an expenditure of Rs. 39,180 on roads, in the year of account relevant to the assessment year under reference. The assessee claimed that the said expenditure was revenue expenditure. The ITO, however, disallowed the claim of the assessee.
Against the decision of the ITO., the matter was taken in appeal before the AAC, Special Range-I, Ahmedabad, by the assessee. As regards the claim of the assessee-company with regard to the foreign tour expenditure of Rohitbhai, the AAC held that the foreign tour undertaken by Rohit Chinubhai was for two purposes (1) to negotiate changes in the collaboration arrangement with M/s. McGaw Laboratories to enable the assessee-company to market its products to new territories; and (2) to negotiate an agreement with M/s. Dade Reagents for setting up an altogether new business involving the manufacture of new products. The AAC held that to the extent the tour of Rohit Chinubhai was undertaken for starting the manufacture of new products, the expenditure was capital in nature, but the expenditure to the extent it was incurred for extending the assessee-companys business to new territories, could not be considered to be capital in nature. He, therefore, directed the ITO to restrict the disallowance to half of the amount spent on the Foreign tour of Rohit Chinubhai. So far as the foreign tour of H. P. Gupta was concerned, the AAC held that his tour was in connection with the new business which was to be started and, therefore, the ITO was justified in disallowing the foreign tour expenditure incurred for him.
As regards the amount of Rs. 1,92,000 paid by way of technical knowhow to M/s. McGaw Laboratories, the AAC held that the allocation to the machinery account, the building account and the testing formula account should be made in the ratio of 9 : 5 : 2. In this manner, he made the allocation of the total expenditure of Rs. 1,92,000 as follows :
Rs.
Machinery account
1,08,000
Building account
60,000
Testing formula account
24,000
Rs. 1,92,000
The AAC held that the assessee-company has wrongly debited Rs. 19,200 to the raw material account and, therefore, the ITO was justified in adding back this amount while computing the total income of the assessee. He, however, directed the ITO to allow depreciation on the expenditure of Rs. 1,06,628 for the machinery and Rs. 60,000 for the building.
As regards the expenditure of Rs. 39,180 incurred on roads, the AAC confirmed the view taken by the ITO.
Against the order of the AAC, cross-appeals were filed by the assessee company and the revenue. The Tribunal disposed of these appeals by its order dated September 30, 1974. The Tribunal held that it was in order to complete the manufacture of blood transfusion unit that the assessee company has decided to manufacture testing chemicals which formed part of it. It, therefore, did not agree with the view taken by the AAC that the assessee-company wanted to start altogether a new business involving manufacture of new products. The Tribunal further held that H. P. Guptas training with M/s. Dade Reagents and Rohit Chinubhais discussion with them were connected with the testing of chemicals. It was further held that since the assessee-company was already manufacturing blood transfusion equipment it could not be said that the expenditure incurred in connection with the manufacture of testing chemicals was capital in nature. The Tribunal further held that H. P. Gupta was an employee of the assessee-company and, therefore, there was no question of the assessee-company acquiring any benefit of enduring nature by getting him trained by M/s. Dade Reagents. It was held by the Tribunal that no part of the expenditure incurred on the foreign tour of H. P. Gupta and Rohit Chinubhai could be disallowed as capital in nature. Hence, the Tribunal allowed the claim of the assessee-company in full in respect of the said expenditure.
As regards the amount of Rs. 1,92,000 paid by way of technical knowhow fees to M/s. McGaw Laboratories, the Tribunal held that the AAC was right in making allocation of the expenditure of RS. 1,92,000 in the ratio of 9 : 5 : 2 on the basis of the letter dated August 3, 1972, of McGaw Laboratories. The Tribunal relying on the decision of this High Court in CIT v. Elecon Engineering Co. Ltd. (1974) 96 ITR 672, held that the assessee-company was entitled to claim depreciation on the expenditure allocated to the machinery and building account. Since the AAC had wrongly mentioned the figure of RS. 1,06,628 in respect of the machinery account, the Tribunal directed the ITO to allow depreciation on the correct figure of Rs. 1,08,000 at the rate applicable to machinery. So far as the building account was concerned, the Tribunal confirmed the order of the AAC giving a direction to the ITO to allow depreciation on the amount of Rs. 60,000 under the head “building”. The Tribunal further directed the ITO to allow the development rebate admissible to the assessee on the said amount of Rs. 1,08,000 provided the conditions laid down in s. 34 off the I.T.Act, 1961, were satisfied.
As regards the expenditure of Rs. 24,000 on the testing formula, the Tribunal held that the said expenditure was revenue in nature and directed the ITO to allow the said expenditure as revenue expenditure.
As regards the expenditure of Rs. 39,180 incurred on roads, the Tribunal, relying on the decision of this court in CIT v., Elecon Engineering Co. Ltd. (1974) 96 ITR 672, held that the new roads constructed by the assessee-company qualified as “plant”. It was held by the Tribunal that the assessee-company was entitled to claim depreciation on the expenditure of Rs. 39,180 incurred for the new roads. Thereafter at the instance of the revenue the four questions as set out hereinabove, m have been referred to us our opinion.
As regards the expenditure incurred by the assessee-company in connection with the foreign tours of Rohit Chinubhai and H. P. Gupta, the ITO has pointed out in the assessment order that in the application dated June 27, 1966, made by the company to the Reserve Bank of India, the purpose of Rohitbhais visit to the U.S.A. was mentioned as negotiating with M/s. Dada Reagents Inc., Miami, U.S.A., for collaboration agreement for the manufacture and distribution of blood serum. As regards H. P. Guptas visit to U.S.A., it is was for the purpose of receiving training with M/s. Dade Reagents Inc. and in a letter addressed to the Reserve Bank of India, as pointed out above, it was stated that “we are also having in view an agreement in principle from M/s. Dade Reagents Inc. of Miami, Florida, an associate of our collaborators, for the manufacture and distribution of blood serum as part expansion program of this company.” This aspect of the case was pointed out by the AAC and in its order the Tribunal has pointed out in para. 5 that it was not disputed that the assessee-company was engaged in the business of manufacture of hospital equipment and one of the equipments manufactured by it is blood donation or transfusion equipment. In fact, the Tribunal was informed that the equipment for collecting, preserving administering and testing formed one unit of the blood transfusion equipment., The testing equipment was, therefore, only a part of the blood transfusion equipment. It was only in order to complete the manufacture of blood transfusion unit that the assessee-company decided to manufacture testing equipment which forms part of it. It cannot, according to the Tribunal, be said that the assessee-company wanted to start an altogether new business involving manufacture of new products as held by the AAC. H. P. Guptas training with M/s. Dade Reagents and Rohit Chinubhais dissection with them were connected with the testing equipment. Since the assessee company was already manufacturing blood transfusion equipment, according to the Tribunal, it cannot be said that the expenditure incurred in connection with the manufacture of testing equipment was capital in nature. In this connection, it must be pointed out that till the stage of the visit of Rohit Chinubhai to the U.S.A. and till the visit for receiving training so far as H. P. Gupta was concerned, the assessee-company was manufacturing equipment for collecting preserving, and administering the blood, but it was not manufacturing testing equipment which was connected with the blood transfusion equipment. That being the case, it is obvious that one more product was to be manufactured so as to complete the manufacture of blood transfusion unit as a whole. On behalf of the revenue the grievance urged by Mr. Desai, learned counsel for the revenue is that, at least, as shown by the AAC, so far as Rohit Chinubhais visit was concerned, one of the objects of his foreign tour was to negotiate with M/s. Dade Reagents Inc., Miami, U.S.A. for a collaboration agreement for manufacture of a new product which the assessee-company was going to manufacture namely, for analysis and testing of various indigenous raw materials. Since this was a new product which, till then, was not manufacture by the assessee Mr. Desai urges that the amount by way of half of the expenditure incurred in the foreign visit of Rohit Chinubhai should not have been allowed as capital expenditure and the entire amount of expenditure for the foreign tour of H. P. Gupta should not have been allowed as revenue expenditure, because that expenditure was incurred in connection with the starting of the manufacture of a new product by the assessee company.
Mr. Patel, the learned counsel for the assessee-company, concedes that the bifurcation of the expenditure incurred in connection with the foreign tour of Rohit Chinubhai, as made by the AAC, was correct and that H. P. Guptas visit to the U.S.A. was in connection with the establishment of a unit for the manufacture of a new product. Under the circumstances, he does not oppose the contention of Mr. Desai regarding the expenditure for foreign tours. Under these circumstances, since the Tribunal has adopted the test of altogether a new business involving the manufacture of new product while considering this item of expenditure of foreign tour, in our opinion, Mr. Desais contention is correct. Hence so far as the expenditure on foreign tour was concerned half of the expenditure incurred by the assessee-company in connection with Rohit Chinubhais visit to the U.S.A. was allowable as revenue expenditure and the remaining half was not allowable as revenue expenditure as claimed by the assessee-company. The entire amount of expenditure incurred by the assessee-company in connection with Guptas visit to the U.S.A. was not deductible as revenue expenditure, so far as the assessment year under reference was concerned.
As regards the item of Rs. 1,92,000, this amount was spent by the assessee-company by way of payment for technical know-how fees to M/s. McGaw Laboratories of the U.S.A. under the collaboration agreement. The ratio of 9 : 5 : 2 was arrived at by the AAC, as regards the allocation of this total amount of RS. 1,92,000 under the different heads, on the basis of the letter dated August 3, 1972, and the Tribunal has also upheld that allocation ratio of 9 : 5 : 2 as correct. Now, it is obvious that, as shown by the letter dated August 3, 1972, a copy of which is annex. D to this reference, the cost of drawing and specifications of machinery and equipment designed especially for the assessee-company for the production capacities of the assessee-company came to 9/16th of the total expenditure of RS. 1,92,00 the cost of drawings and specification of building designed specially as per the need of the assessee-company came of 5/16th of the total expenditure of Rs. 1,92,000 and the glance 1/8th of the total amount of Rs. 1,92,000 was in connection with the cost of preparing and providing additional specifications for analysis and testing of various indigenous raw materials and finished goods to conform with the special secret formulate and for providing production methods for the processes, etc.
Now, as regards the items of Rs. 1,08,000 and Rs. 60,000, being the amounts of machinery account and building account, it is obvious that they were properly allocated by the AAC and it is not open to the revenue to challenge before us this allocation in the ratio of 9 : 5 : 2. Therefore, the assessee-company was entitled to depreciation and development rebate on the amount of Rs. 1,08,000 on the machinery account and depreciation on the amount of Rs. 60,000 on the building account, out of the amount of Rs. 1,92,000.
As regards the expenditure of Rs. 24,000 incurred for the analysis and testing of various raw materials and finished goods., it is important to bear in mind the test laid down by this High Court inn CIT v. Elecon Engineering Co. Ltd. (1974)96 ITR 672 (Guj), where it was pointed out that under s. 32 of the I.T. Act, 1961, depreciation can be claimed : (i) in respect of buildings machinery plant or furniture, (ii) owned by the assessee and used for the purpose of his business or profession, (iii) subject however to the provision of s. 34. If these three conditions are satisfied in respect of any asset, the assessee would be able to avail himself of the depreciation allowance.
The word “Plant” in its ordinary meaning is a word of wide import and it must be broadly construed having regard to the fact that articles like books and surgical instruments are expressly included in the definition of plant in s. 43(3) of the Act. It includes any article or object fixed or movable, live or dead, use by businessman for carrying on his business. It is not necessarily confined to an apparatus which is used for mechanical operations or processes or is employed in mechanical or industrial business. It would not, however, cover the stock-in-trade, that is goods bought or made for sale by a businessman. It would also not include an article which is merely a part of the premises in which the business is carried on. An article to qualify as “plant” must furthermore have some degree of durability and that which is quickly consumed or worm out in the course if a few operations or within a short time cannot properly be called plant. But an article would not be any the less plant because it is small in size or cheap in value or a large quantity thereof is consumed while being employed in carrying on the business. In the ultimate analysis, the inquiry which must be made is as to what operation the apparatus performs in the assessees business. The relevant test to be applied is does it fulfill the function of plant in the assessees trading activity ? Is it the tool of the taxpayers trade ? If it, then, it is plant, no matter that is not very long-lasting or does not contain working part such as a machines does and plays a merely passive role in the accomplishment of the trading purpose. Applying this test to the item of expenditure of Rs. 24,000 incurred for the cost of preparing and providing additional specification for analysis and testing of various indigenous raw materials and finished goods to conform with the special secret formula and for providing production methods for processes, it is clear that this item would be expenditure incurred for plant and, therefore, once it is held to be “plant” that item of expenditure would be available for depreciation. Under the circumstances, the Tribunal was not right in holding that the amount of Rs. 24,000 was revenue in nature.
As regards the amount of Rs. 39,180 spent by the assessee-company on the roads, the Tribunal held purporting to applying the test laid down by this High Court in CIT v. Elecon Engineering Co. Ltd. (1974) 96 ITR 672, that the roads from part of the “Plant” of the assessee-company. It must be pointed out that in terms this very Bench of this court in CIT v. Elecon Engineering Co. Ltd. (1974) 96 ITR 672, has held that the word “Plant” would not include an article which is merely a part of the premises in which the business is carried on. The roads undoubtedly are part of the capital assets of the assessee-company, but, there is no material before us to show that in this particular case, the roads were of such a type as would become part of the “Plant” of the assessee-company. Ordinarily, one would consider the roads constructed in connection with the factory building to be appertaining to the building itself and to be a part of the building to be appertaining to the building itself and to be apart of the building because, in the absence of the roads, the buildings cannot be used for the purpose for which they are designed and built. Mr. Patel for the assessee concedes that, on the facts and in the circumstances of this case, the roads should be treated as building for the purpose of depreciation. Mr. Desai on behalf of the revenue contends that the roads cannot form part of the “Plant” so far as the facts of this cases are concerned. In view of the concession made by Mr. Patel in the light of the facts and circumstances of this case, we held that the amount of Rs. 39,180 being the expenditure incurred in connection with the roads was available for depreciation on the basis that roads form part of the building of the factory and do not form part of the plant of the assessees factory.
Under these circumstances, we answer the questions referred to us as under :
Question No. 1.
In the negative so far as half of the expenditure incurred in connection with the foreign tour of Rohit Chinubhai was concerned, but the remaining half of the expenditure in connection with Rohit Chinubhai and the entire foreign expenses in connection with H. P. Gupta, was not allowable as revenue expenditure.
Question No. 2.
In the affirmative.
Question No. 3.
In the negative.
Question No. 4.
Roads do not form part of the plant, but the item of Rs. 39,1809 spent for the roads is available for depreciation of the basis that roads form part of the building of the assessee-company.
There will be no order as to costs of this reference.
