Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, we are faced with the familiar but not too easy question whether the particular expenditure should be allowed as a revenue expenditure or not. This reference arises out of the assessment far the assessment years 1964-65 to 1966-67 and the relevant accounting years were calendar years 1963 to 1965, respectively. The assessee is a company which carried on, at the relevant time, the business of execution of contracts. There was an agreement entered into between Hindustan Steel Limited, hereinafter called HSL and Dr. C. Otto & Co., Gmbh (German company), the assessee-company, incidentally the name of which has been subseuently changed and we have, by an order passed today, altered that name, and hereinafter the said company is called the assessee-company. The contract was for (1) expansion of coke oven plant, and (2) construction of houses/bungalows including furniture, sanitary and electrical installations in Rourkela Township. It would be appropriate, in our opinion, to describe the heading of the contract which was as follows ; "Contract for the Expansion of Coke Oven Plant at Rourkela, Orissa, India, on a 'Turn-Key' basis including design, supply, civil engineering works, erection, putting into operation, demonstration of performance and supervision of maintenance."
(2.) While we are on the subject-matter of the contract, we must emphasise that this was one transaction and that was clarified by the expression that it was a contract on a "turn-key basis". The nature of the contract, as we shall presently note, would provide us the real key to the solution of the problem before us. It will be necessary to refer, in view of the contentions urged before us, to the relevant provisions of the said contract. Clause 3 of the said contract, principal whereof was the Hindusthan Steel Ltd., hereinafter referred to as HSL, was as follows; "The contractor shall design, supply, execute the complete civil engineering works, erect and put into operation and provide the technical 'know-how' connected with proper and satisfactory maintenance of the plant for the complete Coke Oven Plant and auxiliaries as detailed in the above tenders, including the changes necessary and efficacious, a summary of which is given in annexure I. The entire job will be done by the contracter on a 'turn-key' basis ; in other words, it will be the contractor's contractual obligation to deliver, in consideration of the price to be paid to him, a completely erected plant as summarised in annexure II and put the same into operation and provide the technical 'know-how' connected with proper and satisfactory operation and maintenance of the plant. Claims for additional payment will not be admitted unless otherwise specifically provided in this memorandum of agreement or agreed to at a later date. The purchaser's obligation in connection with the contract work will be restricted to the matters as described hereunder."
(3.) The price of the contract is provided at Clause 5 which covers the value of design, supply, complete civil engineering works, erection, putting into operation, demonstration of performance, supervision of maintenance and providing the technical "know-how" connected with proper and satisfactory operation and maintenance of the plant, which is referred to in annex. II, which formed a part of the agreement and the price provided for the same was indicated in German currency as DM 30,687,650 and Rs. 39,567,000. The annexure to the same is also given at page 76 of the Paper Book. The break-up and the summary of total price is given in annex. I. The price is inclusive of two items which are also indicated in the said Clause 5. It is not material for our present purpose to deal with the break-up given in the said annexure. There are mutual obligations, both of the principal as well as of the contractors, and we will mainly have to concentrate on the said mutual obligations of the principal and the contractors. Sub-clause (1) of Clause 15 deals with erection and provides as follows : "15. Erection : (i) Based on a period of 4 months transportation time from f.o.b. stage to erection site for imported materials, erection will start by the 15th month and end by 34th month from the date of commencement of contract. The contractor will assemble and erect the contractplant and equipment supplied by him and satisfactorily put up the plant with his personnel. All expenses in connection with the erection work, including cost of erection personnel and provisions of erection tackle, tools and equipment and materials necessary for erection and the cost of their insurance, freight to and from erection site and Customs Duty and any other duties and taxes for the same, are included in the contract price for erection.";