COMMISSIONER OF INCOME TAX Vs. ASHOKA MILLS LIMITED

JUDGEMENT

(1.) AT the instance of the Revenue, the following questions of law have been referred to this Court by Tribunal, Ahmedabad Bench B, arising from its order dt. 20th Aug., 1982, in ITA No. 1147/Ahd/80, in respect of the asst. year 1977 78 :

(2.) AS far as question No. 1 is concerned, the relevant facts found by the Tribunal are that the assessee purchased three items of machinery in the years 1965 and 1966 for a total amount of Rs. 7,26,394 D.M. The liability of the purchase price was discharged by obtaining a foreign exchange loan from the ICICI. The payment was to be made in foreign currency only and the repayment schedule was spread over a period of 11 years, two instalments being paid in each year. In the books of accounts the loan was maintained in rupees at the exchange rate on the date when the machinery was purchased. On 1st Jan., 1976, the balance amount of loan payable to ICICI on account of these machineries was Rs. 2,17,252 equivalent to DM 93,643. On 30th June, 1976, an instalment of DM 45,866 was paid for which the payment in rupees amounted to 1,68,007 as against which the balance provided for in the books at the original exchange rate was Rs. 1,06,409. This involved a payment of Rs. 61,598 extra towards the instalment. Likewise, on the second instalment paid on 31st Dec., 1976, the assessee had to pay a sum of Rs. 72,563 extra on account of foreign exchange fluctuations. In respect of the payments earlier made there being a sum of Rs. 1,167 owing to the assessee on account of the same fluctuation the total amount payable by the assessee in respect of the two instalments due in the year came to Rs. 1,32,992. It was this amount which was claimed by the assessee as revenue expenditure.

(3.) AS far as question No. 2 is concerned, the same is regarding royalty paid by the assessee for the user of trade Mark "Tebilized". The facts regarding the said question as found by the Tribunal are that the assessee had entered into an agreement dt. 30th Sept., 1978, with M/s Mettur Beardsell Ltd. for user of the trade mark "Tebilized". The assessee's claim for a sum of Rs. 16,237 being royalty for the use of the trade mark "Tebilized" as revenue expenditure was disallowed by the ITO on the ground that the above trade mark belonged to Tootal, an English company who had an agreement with its Indian agency called Mattur Beardsell Ltd. The ITO proceeded on the basis that Mettur Beardsell Ltd. itself was not the owner of the above trade mark and that the Govt. had withdrawn permission for the Tootal Co. to operate from 1972 and that, Mettur Beardsell Limited cannot be said to be rendering any services to the assessee company. On appeal, the CIT(A) allowed the claim of the assessee. While dismissing the appeal preferred by the Department, the Tribunal found that the assessee had entered into two different agreements with Mettur Beardsell one for the supply of technical knowhow and service agreement and the other for the use of trade mark "Tebilized". Both these agreements were dt. 30th Sept., 1972. The Tribunal further found that the supply of knowhow agreement dt. 30th Sept., 1972, was supplementary to the main agreement dt. 29th Dec., 1970, entered into between the assessee company, Mettur Beardsell Ltd. and Arvind Mills Ltd. The Tribunal further observed that the assessee was using the trade mark "Tebilized" representing a particular process and had also to stamp the trade mark on the cloth produced, and that the payment of royalty for the use of said trade mark by the assessee company was at the rate of a particular amount per square metre and that the same clearly indicated that the expenditure was connected with the production. The Tribunal held that the payment of royalty was clearly under the agreement between the assessee and Mettur Beardsell Ltd., since not merely the ownership of a trade mark but even the right to use the said trade mark could be parted with for a consideration. The Tribunal further held that the two companies in question were distinct entities dealing at arm's length and it certainly could not be urged that the payment was made for any consideration other than business. The Tribunal, therefore, held in favour of the assessee that the payment of royalty in question was a revenue expenditure.