- (1.) The assessee/respondent is a company manufacturing cigarettes under the franchise agreement with M/s G.T.C. Industries Ltd., Bombay. The asst. yr. 1986-87 was the first year of the business of the assessee-company and it has paid a sum of Rs. 3,26,520 as royalty charges to M/s G.T.C. Industries Ltd. during the asst. yr. 1986-87 and claimed payment of said royalty charges as revenue expenditure. There was an agreement dt. 18th Jan., 1985 of the assessee/respondent with M/s GTC Industries Ltd. according to which the assessee/respondent was required to pay royalty charges of Rs. 1 per thousand cigarettes manufactured for acquiring GTC's know-how and technical assistance as well as for the use of their trademark. The GTC company as per the terms of the agreement agreed to provide the services of its technical personnels as and when required, but the marketing of the cigarettes was left to the assessee/respondent. The said agreement was valid for a period of five years with the condition that after expiry of five years, the assessee/respondent would continue to manufacture the cigarettes and to use technical know-how provided to it by M/s GTC Industries Ltd. on such terms and conditions as may be mutually agreed upon.
(2.) The AO took a view that payment of royalty which is subject-matter of present reference by the assessee-company was a capital expenditure and accordingly it was disallowed and added back in the income of the assessee for the assessment year in question, i.e., 1986-87. The said order was confirmed in appeal by the CIT(A), but has been set aside by the Tribunal. The Tribunal held that the payment of royalty by the assessee/respondent was nothing but a revenue expenditure just to keep their factory going and no asset of enduring nature was obtained by the assessee.
(3.) At the instance of the CIT, the Tribunal, Allahabad has referred the following question of law for opinion to this Court : "Whether, on the facts and in the circumstances of the case, the Hon'ble Tribunal was justified in holding that payment of royalty by the assessee-company to M/s G.T.C. Industries Ltd. is a revenue expenditure ?";