Pathak, J. - (1.) THE Income-tax Appellate Tribunal has referred the following question for the opinion of this court : " Whether, on the facts and circumstances of the case, the expenditure of Rs. 50,000 was a capital expenditure which could not be allowed as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ? "
(2.) THE assessee, the British India Corporation Ltd., Kanpur, carries on the business of manufacture and sale of woollen goods, cotton textiles and hides and leather products. THE activity of tanning hides and manufacturing leather products is carried on under the name and style of Cooper Alien and North West Tannery branches. For the assessment year 1959-60 (the relevant accounting year being the calendar year ending December 31, 1958), the assessee claimed a deduction of Rs. 50,000 paid to Messrs. Textile and General Supplies Private Ltd., Bombay, to whom we shall refer as" Textile and General Supplies ". THE claim was made on the basis that the assessee was bound under an agreement with Messrs. Charles Walker and Co., London (referred to hereafter as "Charles Walker"), to pay that amount to Textile General Supplies for meeting the initial expenses of establishing it as distributor of the assessee's products. THE Income-tax Officer rejected the claim, and the Appellate Assistant Commissioner upheld the decision. THE claim was pressed in second appeal before the Income-tax Appellate Tribunal and the Tribunal also rejected it. At the instance of the assessee, the Tribunal has now made this reference. Section 10(2)(xv) of the Indian Income-tax Act, 1922, entitles an assessee to claim a deduction in the computation of its profits and gains of business in respect of an expenditure, not being in the nature of capital expenditure, laid out or expended wholly or exclusively for the purpose of such business. The agreement between the assessee and Charles Walker stipulated that Charles Walker would permit the use by the assessee of a number of registered trade marks specified in the agreement and would further disclose and make known to the approved officers of the assessee the technique, practices, and application of specialised tanning processes. Besides providing for the provision of technical supervision by Charles Walker and payment by way of salary, travelling expenses and maintenance to the personnel sent out by it to India, the agreement also provided that in the event of liberalisation of imports Charles Walker would limit its exports to India of certain products. The assessee undertook to pay to Charles Walker technical fees calculated at 5% on the selling price of the products produced by the processes disclosed to it. Then follows paragraph 7 of the agreement : " The second participant (the assessee) agrees to appoint Textile and General Supplies Private Ltd., Army and Navy Building, Mahatma Gandhi Road, Bombay-1, India, a nominee of the first participant (Charles Walker) as distributors of the second participant for the sale of industrial leather manufactured by the second participant ,in India for the period of this agreement at a discount of 15% (fifteen per cent.) on the prices at which industrial leather covered by this agreement are sold to textile mills and other consumers. In addition the second participant will pay Rs. 50,000 (Rs. fifty thousand only) to the distributors for meeting the initial expenses of establishing the distributorship of the second participant on the express understanding that the first participant will not part with his interest in Textile and General Supplies Private Ltd., without the prior approval in writing of the second participant."
(3.) THE period of the agreement was seven years. It is apparent that pursuant to paragraph 7 the assessee was bound to appoint Textile and General Supplies, nominee of Charles Walker, as its distributors for the sale of industrial leather manufactured by it in India. The assessee was obliged to pay Rs. 50,000 to the distributors for meeting the initial expenses of establishing the distributorship.;