{"id":240219,"date":"2011-10-14T00:00:00","date_gmt":"2011-10-13T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/income-tax-reference-no-81-of-1987-vs-unknown-on-14-october-2011-2"},"modified":"2017-05-16T23:42:14","modified_gmt":"2017-05-16T18:12:14","slug":"income-tax-reference-no-81-of-1987-vs-unknown-on-14-october-2011-2","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/income-tax-reference-no-81-of-1987-vs-unknown-on-14-october-2011-2","title":{"rendered":"Income Tax Reference No. 81 Of 1987 vs Unknown on 14 October, 2011"},"content":{"rendered":"
Gujarat High Court<\/div>\n
Income Tax Reference No. 81 Of 1987 vs Unknown on 14 October, 2011<\/div>\n
Author: Mohit S. D.A.Mehta,<\/div>\n
     IN THE HIGH COURT OF GUJARAT AT AHMEDABAD\n\n\n\n     INCOME TAX REFERENCE No 81 of 1987\n\n\n\n\n     For Approval and Signature:\n\n\n\n              Hon'ble MR.JUSTICE M.S.SHAH\n                                 and\n              Hon'ble MR.JUSTICE D.A.MEHTA\n\n\n     ============================================================\n<\/pre>\n
    1. Whether Reporters of Local Papers may be allowed      : YES
\n       to see the judgements?\n<\/p>\n
    2. To be referred to the Reporter or not?                  : YES<\/p>\n
    3. Whether Their Lordships     wish to see the fair copy   : NO
\n       of the judgement?\n<\/p>\n
    4. Whether this case involves a substantial question       : NO
\n       of law as to the interpretation of the Constitution
\n       of India, 1950 of any Order made thereunder?\n<\/p>\n
    5. Whether   it is to be circulated to the Civil Judge?    : NO<\/p>\n
     ————————————————————–
\n     COMMISSIONER OF INCOME TAX
\nVersus
\n     JYOTI ELECTRIC MOTORS LTD\n<\/p>\n
     ————————————————————–
\n     Appearance:\n<\/p>\n
     1. INCOME TAX REFERENCE No. 81 of 1987
\n          MR BB NAIK with MR MANISH R BHATT for Petitioner No. 1
\n          MR JP SHAH for Respondent No. 1<\/span><\/p>\n
     ————————————————————–\n<\/p>\n
              CORAM : MR.JUSTICE M.S.SHAH
\n                                 and
\n                      MR.JUSTICE D.A.MEHTA<\/p>\n
     Date of decision: 01\/11\/2001<\/p>\n
ORAL JUDGEMENT
\n               (Per : MR.JUSTICE D.A.MEHTA)
\nThe revenue has sought reference on the following
\nthree questions of law under section 256 (1) of the
\nIncome-tax Act, 1961 (hereinafter referred to as `the
\nAct’):-\n<\/p><\/blockquote>\n
(i) “Whether, on the facts and in the circumstances
\n        of   the   case, the assessee is entitled to
\n        allowance of royalty payment of Rs.12,16,694\/- as
\n        revenue expenditure?”\n<\/p>\n
(ii) “Whether on the facts and in the circumstances of
\n        the case, the amount of Rs.3 lakhs being know-how
\n        fees and royalty of Rs.1,03,068\/- payable to the
\n        Jyoti Ltd. are allowed as revenue expenses?”\n<\/p>\n
(iii) “Whether in law and on facts,   the assessee is
\n        entitled to the deduction     of Rs.50,000\/- as
\n        technical report fees?”\n<\/p>\n
2.The assessment year is 1981-82 and the relevant
\naccounting period if financial year ended on 31st March,
\n1981. The assessee is a limited company.    The assessee
\nclaimed deduction on the following items in its return of
\nincome:-\n<\/p>\n
(i) royalty payment of Rs.12,16,694\/- paid to Jyoti
\n        Ltd. under agreement dated 1st September, 1972 as
\n        revenue expenditure.\n<\/p>\n
(ii) Rs.3 lacs know-how fees and Rs.1,03,068\/- being
\n        royalty paid to Jyoti Ltd.      under   another
\n        agreement dated 1st January, 1981 as revenue
\n        expenditure, and<\/p>\n
(iii) Rs.50,000\/- as   technical report fees as revenue
\n        expenditure.\n<\/p>\n
3.We have heard Mr BB Naik, learned Standing
\nCounsel for the revenue-applicant and Mr JP Shah learned
\nadvocate appearing on behalf of the assessee-respondent.\n<\/p>\n
4.In so far as question No.2 is concerned, it is
\ncommon ground between the parties that the said question
\nis concluded in assessee’s favour by decision dated 3rd
\nNovember, 1999 rendered by this Court in Income Tax
\nApplication No.269 of 1999 between the same parties.\n<\/p>\n
5.In so far as third question is concerned, the
\nAssessing Officer disallowed the sum of Rs.50,000\/holding
\nthat the technical report fees were paid to Jyoti
\n Consultants Ltd.       for   ascertaining feasibility of
\nmanufacturing motors of different kind than the motors
\nwhich    were    already   being   manufactured   by   the
\nassessee-company. In appeal, the Commissioner (Appeals)
\nheld that in principle the payment was allowable as
\nrevenue expenditure because the report had been obtained
\nfor the purpose of expansion of existing business, “that
\nexpansion had actually taken place and the cost of
\ncapital assets had been duly capitalised in the year
\nunder consideration as well as        subsequent   years”.
\nHowever, for the purposes of ascertaining whether the
\npayment had actually been made or not during the relevant
\naccounting period, the CIT (Appeals)        directed   the
\nIncome-tax Officer to examine the various documents and
\nthen grant relief to the assessee.\n<\/p>\n
6.The Tribunal has recorded in para-14 of its order
\nthat the Income-tax Officer examined the relevant papers
\nand allowed relief to the assessee-company in pursuance
\nof the directions issued by the Commissioner (Appeals).
\nIn light of the aforestated facts, the Tribunal concurred
\nwith the finding recorded by the CIT (Appeals) that
\nexpansion had actually taken place and that the cost of
\ncapital assets has been capitalised during the relevant
\naccounting period as well as in subsequent years.     The
\nTribunal thus upheld the claim of the assessee that the
\nassessee-company   was   entitled   to    deduction    of
\nRs.50,000\/paid for technical report fees as revenue
\nexpenditure.\n<\/p>\n
7.Having heard both the sides, we do not find any
\ninfirmity in the order of the Tribunal as both the CIT
\n(Appeals) and the Tribunal have taken into consideration
\nthe facts on record and after appreciating the evidence,
\narrived at a finding of fact that the expenditure in
\nquestion was incurred for the purpose of expansion of
\nexisting business.    The third question is therefore
\nrequired to be answered in favour of the assessee.\n<\/p>\n
8.Coming to question No.1, it was the submission of
\nMr Naik that the issue has been concluded against the
\nassessee by decision rendered between the same parties
\nreported in (1999) 237 ITR 280. As against this, Mr JP
\nShah relied upon the decisions of this Court again
\nbetween the same parties rendered on the following dates
\nand in following references.\n<\/p>\n
Sr.Income TaxDate ofAssessment year
\nNo.Referencedecision
\nNo(s).\n<\/p>\n
 ———————————————————
\n(1)389\/841-2-20001979-80<\/p>\n
(2)374, 374A &     26-12-20001982-83, 1983-84
\n374B of 1992 & 1984-85<\/p>\n
(3)192\/9426-12-20001985-86 & 1986-87\n<\/p>\n
———————————————————\n<\/p>\n
It was contended by Mr Naik that in all the aforesaid
\nunreported decisions rendered by this Court reliance had
\nbeen placed on the decision of CIT vs.        Jyoti Ltd.<\/a>
\n(1971) 118 ITR 499 (Gujarat) while in case of reported
\ndecision in 237 ITR 280 this Court had subsequently
\nreferred to and upheld the finding of the Tribunal that
\nthe said decision     was   distinguishable   on   facts.
\nAccording to Mr Naik, therefore, we should adopt the
\nreasoning which appealed to this Court in the aforesaid
\nreported decision and an additional factor for doing so,
\nit was submitted was the fact that the decision of Apex
\nCourt in case of Jonas Woodhead and Sons (India) Ltd.
\nvs. CIT<\/a> 224 ITR 342 had been followed.\n<\/p>\n
9.In view of the aforestated position,        after
\nhearing the matter partially it was adjourned so as to
\nenable the parties to place the original agreement dated
\n1st September, 1972 on record. By consent of both the
\nparties, the same has been taken on record.\n<\/p>\n
10.Referring to the terms of the agreement, Mr Naik
\ncontended that the assessee had derived a benefit of
\nenduring nature resulting in acquisition of the benefit
\nin the capital field and hence the Income-tax Officer had
\nrightly held that the expenditure in question was capital
\nin nature and the deduction claimed was not permissible.
\nIt was contended that the agreement was initially for a
\nperiod of ten years but the same was extendable for such
\nfurther period as may be agreed in writing between the
\nparties to the agreement. That even after expiry of the
\nagreement period or the extended period, the agreement
\ncontinued to remain in force until it was terminated by
\none of the parties by giving notice in writing of not
\nless than one year. Mr Naik further submitted that this
\ncondition by itself went to show that this was an
\nagreement which was not limited in point of time but was
\nextendable for indefinite period and the assessee-company
\nwas entitled to utilise the technical data like drawing,
\nspecifications etc. for all times to come and hence the
\npayment in question was not really royalty but capital
\nexpenditure for the purposes of acquisition of advantage
\nin capital field.     It was further submitted that even
\n after   the   termination   of   the    agreement,   the
\nassessee-company was not required to stop manufacturing
\nthe said products nor was it stipulated that         the
\ntechnical knowledge acquired by the assessee-company was
\nnot to be utilized by the        assessee   -company  in
\nmanufacturing the products which it was entitled to
\nmanufacture under the agreement.\n<\/p>\n
11.As against this, our attention was invited by Mr
\nShah to the preamble of the agreement as well as various
\narticles in support of his submission that the assessee
\nwas merely a licensee under the agreement and the rights
\nto manufacture the specified products which were acquired
\nunder the agreement were only in relation to user of an
\nasset and were not      exclusively   assigned   to   the
\nassessee-company.\n<\/p>\n
12.The preamble of     the   agreement   dated   1st
\nSeptember, 1972 as well as Article 1 specifically make it
\nclear that Jyoti Ltd. with whom the assessee-company has
\nentered into an agreement has only granted the licence to
\nmanufacture electric motors which were being manufactured
\nby Jyoti Ltd.     and for this purpose Jyoti shall render
\ntechnical and other experienced guidance to the licensee
\ni.e. the assessee.     It is pertinent to note that Jyoti
\nhas reserved the right to grant similar licence for
\nmanufacturing   the   same products covered under the
\nagreement to any other party and        furthermore    the
\nlicensee, namely the assessee, is bound by the terms of
\nagreement and the benefits under the agreement are
\nnonassignable or nontransferable.    The Articles dealing
\nwith the duration of the agreement as well as termination
\nof agreement read together go to show that the agreement
\nis   liable to be terminated even earlier than the
\nstipulated date and it is not necessary that the entire
\nterm for which the agreement is entered into, the
\nassessee would be entitled to the benefits granted under
\nthe agreement.   Article 3 which deals with right to sell
\nmotors has specifically provided that the sale of the
\ndefined products covered under the agreement shall be
\nexclusively done through Jyoti Sales Organisation both
\nwithin and outside the territories of India; and further
\nthat the agreement does not       preclude   Jyoti    from
\nmanufacturing and selling the said products within the
\nsame territories i.e. within and outside India.      There
\nis a further stipulation in the same Article that in case
\nJyoti is unable to sell the said products manufactured by
\nthe licensee, the licensee shall be free to enter into
\ndirect sales but no other sole selling agent will be
\nappointed by the licensee, and furthermore in such an
\neventuality it would be open to Jyoti, namely licensor,
\n to withdraw the use of its name on the said products
\nmanufactured by the assessee-company.      Article 4 (E)
\nspecifically    stipulates   that    all   the   technical
\ndocumentation supplied by the       licensor   under   the
\nagreement shall be treated as strictly confidential and
\nthe licensee shall not be in a position to part with such
\ninformation in favour of any other party.          Similar
\nprovision is found in Article 5(D).\n<\/p>\n
13.Over   and   above   the aforestated terms and
\nconditions stipulated in the agreement it is pertinent to
\nnote that the payment of royalty and fixation of price
\nhad been laid down in Article 8(A) of the agreement. The
\nlicensee is required to pay royalty at the rate of 7% on
\nthe net sale price of products manufactured in terms of
\nthe agreement to Jyoti and it is further provided as to
\nwhat would be the net sale price in such circumstances.
\nTherefore, the measure of payment of royalty is the sales
\nmade by the assessee-company.\n<\/p>\n
14.Having considered the terms of the agreement in
\nlight of the law laid down by various decisions cited by
\nboth the sides, we feel that the assessee-company did not
\nacquire any enduring advantage in the capital field in
\nview of the terms and conditions stipulated in the
\nagreement.   The assessee-company has been merely granted
\na nonexclusive licence for the use of an asset and under
\nthe agreement, there is no acquisition of any asset which
\nwould render the payment in question to be treated as
\ncapital in nature. The royalty is payable on the basis
\nof the sales which the licensee would make solely through
\nthe sole selling agent appointed by the licensor and thus
\nthe payment is strictly linked with the quantum of sales
\nand would vary with the quantum of sales.\n<\/p>\n
15.The decision rendered in Jyoti Electric Motors
\nLtd. vs.     CIT,<\/a> 237 ITR 280 was rendered in context of
\nthe following question which was there before the Court:-\n<\/p>\n
 “Whether, on the facts and in the circumstances
\n        of the case, the Tribunal was right in holding
\n        that the Commissioner was justified in passing
\n        the order under section 263 of the Act in setting
\n        aside the assessment order?”\n<\/p>\n
16.The Tribunal had upheld that assumption       of
\njurisdiction under   sec.     263 of the Act by the
\nCommissioner and the assessee in reference challenged
\nthat order of the Tribunal. The Court was called upon to
\nopine as to whether prima-facie the Commissioner had
\ncorrectly assumed the jurisdiction as held by        the
\n Tribunal, and the Court was not called upon to render any
\nopinion as regards the merits of the claim of the
\nassessee. The observations made in the said judgment,
\ntherefore, shall have to be read as having limited
\napplication in the context of the controversy which was
\nthere before the Court.\n<\/p>\n
17.As regards the contention of Mr Naik that the
\nassessee company was entitled to continue to manufacture
\nthe motors under the agreement even after the expiry of
\nthe period of the agreement, it can be seen that such
\nuser was subject to the licensee company making payment
\nof royalty on the basis of sales made on manufactured
\nproducts after the termination of the agreement. What is
\nmore important, however, is that the licensee company is
\nrequired to return to Jyoti Ltd.         all the technical
\ndocumentation within one month       in   the   event   of
\ntermination or    lapse   of   the agreement.     In this
\nconnection it is pertinent to note that, in the case of
\nCommissioner of Income-tax vs. Power Build Ltd.<\/a> (2000)
\n244 ITR 19, this Court has held that even in a case where
\nthe assessee was entitled to retain all the technical
\ndata, design, documentation etc. and there was also no
\nrestriction on manufacture, even then the payment of
\nroyalty was allowable as revenue expenditure in view of
\nthe fact that the assessee was not a new unit engaged in
\nmanufacturing and the benefit was acquired only for
\nrunning the existing business.     In the present case,
\nadmittedly   the    agreement was entered into on 1st
\nSeptember, 1972 and the assessment year in consideration
\nis 1981-82.    The Assessing Officer has disallowed the
\nclaim only on the basis of his orders for the earlier
\nassessment years.    Therefore, though a faint attempt was
\nmade by Mr Naik to contend that the assessee had not set
\nup the business, the facts on record go to show otherwise
\nand applying the ratio of the aforesaid decision in the
\ncase of Power Build Ltd. (supra) it is not possible to
\nfind any fault with the order of the Tribunal.\n<\/p>\n
18.We have taken into consideration the following
\ndecisions cited by Mr Naik and Mr Shah respectively and
\nhave borne in mind the ratio of the said decisions while
\narriving at the aforesaid opinion.\n<\/p>\n
Mr Naik:\n<\/p>\n
(i)237 ITR 280 (Guj) Jyoti   Electric  Motors
\n                                Ltd. vs. CIT.<\/a>\n<\/p>\n
(ii)224 ITR 342 (SC) Jonas   Woodhead and Sons
\n                                 (India) Ltd. vs.   CIT
\n Mr JP Shah<\/a>:\n<\/p>\n
(i)87 ITR 400 (SC)    Mewar   Sugar    Mills Ltd.\n<\/p>\n
                                     vs. CIT<\/p>\n
(ii)59 ITR 718 (SC)    Gotan Lime Syndicate      vs.
\n                                  CIT.\n<\/p>\n
(iii)68 ITR 493 (SC)    M A Jabbar vs. CIT\n\n\n(iv) 236 ITR 314 (SC) CIT      vs.    Wavin   (India)\n                                     Ltd.\n\n\n(v)232 ITR 316 (SC) CIT vs.               I.A.E.C.\n                                     (Pumps) Ltd.\n\n\n<\/pre>\n
19.In light of what is stated hereinbefore, we hold
\nthat the Tribunal was right in law in holding that the
\nassessee was entitled to allowance of royalty payment of
\nRs.12,16,694\/- as revenue expenditure.\n<\/p>\n
20.All the three questions are, therefore, answered
\nin the affirmative i.e.     in favour of the assessee and
\nagainst the revenue.\n<\/p>\n
21.The Reference stands disposed of accordingly with
\nno order as to costs.\n<\/p>\n
(M.S.   Shah,J)<\/p>\n
(D.A.   Mehta,J)<\/p>\n
zgs\/-<\/p>\n","protected":false},"excerpt":{"rendered":"
Gujarat High Court Income Tax Reference No. 81 Of 1987 vs Unknown on 14 October, 2011 Author: Mohit S. D.A.Mehta, IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 81 of 1987 For Approval and Signature: Hon’ble MR.JUSTICE M.S.SHAH and Hon’ble MR.JUSTICE D.A.MEHTA ============================================================ 1. Whether Reporters of Local Papers may be […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[16,8],"tags":[],"class_list":["post-240219","post","type-post","status-publish","format-standard","hentry","category-gujarat-high-court","category-high-court"],"yoast_head":"\nIncome Tax Reference No. 81 Of 1987 vs Unknown on 14 October, 2011 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/income-tax-reference-no-81-of-1987-vs-unknown-on-14-october-2011-2\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Income Tax Reference No. 81 Of 1987 vs Unknown on 14 October, 2011 - 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