Decided on December 15,1983



H.S.GOEL, J. - (1.)BY this reference the Income -tax Appellate Tribunal (hereinafter called " the Tribunal") has referred for the opinion of this Court the following question of law arising out of the order of the Tribunal in the case of the assessee, M/s Crescent Capacitors, New Delhi, for the asst. year 1970 -71 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the disallowance of the assessee's claim for deduction of Rs. 20,000 paid to Shri A. C. Gupta as not qualified for deduction as per the provisions of ss. 35(1) and 43(4) or 37(l) of the IT Act ?"

(2.)THE assessee was a firm manufacturing capacitors for use of radios and transistors. The previous year of the assessee relevant to asst. year 1970 -71 ended on July 31, 1969. The firm consisted of three partners, all of whom were the sons of one A. C. Gupta, who was the founder of the firm. The firm needed a component called "etched foils" for manufacture of capacitors by it. The assessee approached the Government of India for the grant of an import licence to it for importing etched foils. This application of the assessee was rejected and the assessee was required to etch the foils by themselves. The assessee approached the said A. C. Gupta to help it either in getting the import licence or to prepare etched foils indigenously. A. C. Gupta, in his letter dated December 20, 1968, wrote to the assessee stating that he was prepared to undertake the research provided the firm agreed to pay Rs. 20,000 to him to cover the cost of labour in the event of success and A. C. Gupta was to pass on the technique as developed by him to the assessee - firm. This offer of A. C. Gupta was accepted by B. Mohan, the partner of the assessee -firm. On behalf of the firm, he, in his letter, dated January 27,1969, offered to pay Rs.20,000 to A. C. Gupta subject to two conditions, namely -(i) that in the event of the research of A. C. Gupta not leading to any positive result, the firm was not to be liable to pay any sum to him, and (ii) that the know -how developed by A. C. Gupta was to be given to the assessee -firm on exclusive basis.
A. C. Gupta accepted the said offer of the assessee -firm and successfully developed the technique of manufacturing etched foils. The assessee thereon paid a sum of Rs. 20,000 to A. C. Gupta in the previous year relevant to asst. year 1970 -71 and claimed its deduction in computing its income for that year. The assessee claimed the deduction on this amount either under S. 35(1)(iv) as an expenditure of capital nature on scientific research relating to the business carried on by the assessee or under S. 37(1) of the INCOME TAX ACT, 1961 (hereinafter called as "the Act"), as expenditure wholly and exclusively incurred for purposes of the assessee's business. The ITO took the view that the assessee had purchased the know - how from A. C. Gupta for a consideration of Rs. 20,000 and further that the expenditure in question was capital expenditure. The claim of deduction was accordingly disallowed by the ITO.

(3.)THE AAC, in appeal by the assessee against the assessment order of the ITO, observed that the amount allegedly shown as having been paid by the assessee to A. C. Gupta was indirectly received back by the partners of the firm. A. C. Gupta was a benamidar of the assessee's partners. He thus was of the view that the amount was not actually paid by the firm to A. C. Gupta and the claim was not a genuine one. Regarding the legal position as to the allowability of the sum in question, he upheld the finding of the ITO that the amount in question could not be said to be an expenditure on scientific research relating to the business carried on by the assessee. The AAC, however, did not consider the claim of the assessee under S. 37(1) of the Act.

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