- (1.) These three appeals relating to assessment years 1966-67, 1968-69 and 1969-70 respectively (the accounting periods in respect whereof ended on 30-9-1965, 30-9-1967 and 30-9-1968 respectively) raise a common question of law for our determination, namely : Whether on the facts and in the circumstances of the case and on a true interpretation of the collaboration agreements between the assessee and M/s. Metrimpex Hungarian Trading Company, Budapest, the payment of Rs. 1,60,000/- by the assessee to the foreign collaborator was attributable partly or wholly towards the acquisition of a depreciable asset
(2.) Briefly stated the facts giving rise to the question are these. M/s. Scientific Engineering House (P) Ltd. (hereinafter called the assessee) manufactures scientific instruments, and apparatus like Dumpy levellers, levelling staves, prismatic compass, etc. It entered into two separate collaboration agreements, one dated 15th March 1961 and the other dated 31st March, 1961 with M/s. Metrimpex Hungarian Trading Company, Budapest for undertaking the manufacture of microscopes and theodolites, under which the said foreign collaborator, in consideration of payment of Rs. 80,000/- each (Rs. 1,60,000/- under both the agreements together), agreed to supply to the assessee all the technical know-how required for the manufacture of these instruments. The object of both the agreements was to enable the assessee to manufacture the said instruments of certain specifications and the. assessee thereunder acquired the right to manufacture in India under its own trade mark and name but under the licence - MOM Hungary - of the foreign supplier the said instruments and the right to sell the same in India. To enable the assessee to manufacture these instruments in India in the manner just indicated the foreign collaborator, inter alia, agreed to render 'documentation service' by supplying to the assessee an up-to-date and correct complete set each of the five types of documents (such as manufacturing drawings, processing documents, designs, charts, plans and other literature more specifically detailed in Clause 3 of the agreements). There was also a provision enjoining the foreign collaborator to render training and imparting of knowledge of the know-how technique of manufacturing these instruments. Pursuant to the agreements the assessee made full payment of Rs. 1,60,000/- (Rs. 80,000/- under each of the agreements) to the foreign collaborator and the latter rendered 'documentation service by supplying complete sets of all the documents including designs, drawings, charts, plans and other literature as per Clause 3. The sum of Rs. 1,60.000/- was debited by the assessee under the head 'Library'.
(3.) For the assessment year 1966-67 for which relevant accounting year ended on 30th September, 1965 the assessee claimed a sum of Rs. 12,000/- by way of depreciation on 'Library'. Such depreciation was claimed on the ground that the payment of Rs. 1,60,000/- had been made really for the outright purchase of designs, drawings, charts and other literature which were voluminous, occupying almirahfull of storage space and these collectively constituted the pages of a book and the assessee had claimed depreciation at the appropriate rate. The Income-tax Officer held that the sum of Rs. 1,60,000/- did not represent the value of books purchased by the assessee but represented the price paid for acquiring the technical know-how which amounted to capital expenditure but since no tangible or depreciable asset was brought into existence no depreciation allowance could be claimed. On appeal preferred by the asessee, however, the Appellate Assistant Commissioner held that what the assessee had done was to make an outright purchase of certain specimen drawings charts, plans, etc. on special papers, that these documents when collected together constituted a book on which depreciation, as in the case of plant and machinery would, at the appropriate rate be allowable and he directed the Income-tax Officer to allow the depreciation claimed. In the further appeal preferred by the Department the Tribunal took the view that Clauses 2, 3, 4, 5 and 10 of the agreements did not lend support to the stand taken by the assessee that payments (Rs. 80,000/- each) had been made mainly for the supply of designs, drawings, charts,, etc., that the services to be rendered by the foreign collaborator covered a wide field and that the supply of designs, drawings, charts, etc. was incidental and only in furtherance of other services which the foreign collaborator was expected to render. It further took the view that since the supply of designs, drawings, charts, etc. was only incidental and the payment of Rs. 1,60,000/- could not entirely be held to represent the purchase price of those documents it was unnecessary for them to go into the question whether the said documents fell within the meaning of the expression 'books' and whether depreciation was, therefore, admissible thereon. The Tribunal, however, held that the agreements showed that some of the services which the foreign collaborator was required to render to the assessee were on revenue account (as, for example, the provision which required the foreign collaborator to depute their experts to correct any flaws or irregularities that might be encountered in the course of the production) and that therefore the payment of Rs. 1,60,000/- was partly on capital account and partly on revenue account. As the appeal was by the Department and not by the assessee and the Department could not be in a worse position than what it was when it came up in appeal the Tribunal held that even if it were to hold that part of the payment was allowable as revenue expenditure the allowance could not exceed Rs. 12,000/-, being the deduction allowed by the Appellate Assistant Commissioner. In other words the Tribunal confirmed the deduction of Rs. 12,000/- not as depreciation allowance but as revenue expenditure and in this manner it confirmed the order of the Appellate Assistant Commissioner.;