Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, we are concerned with the assessment for the assessment year 1962-63, for which the relevant previous year ended on the 31st October, 1961. The assessee, Messrs. Associated Electrical Industries Manufacturing Co. Private Ltd., is a company incorporated in India and is a 100 per cent. subsidiary of another company known as Associated Electrical Industries (India) Ltd. There was an amalgamation of the two companies approved by an order of the High Court on the 7th September, 1965. We are, however, dealing with a period when the two companies were in existence separately and, therefore, these two companies have been treated as separate entities. The Associated Electrical Industries (India) Ltd., the holding company, was itself a subsidiary of a well-known foreign company known as Associated Electrical Industries, London. By virtue of an agreement between the Associated Electrical Industries (India) Private Ltd., hereinafter referred to as "the agent-company", and the Associated Electrical Industries Ltd., London, hereinafter referred to as "the English company", the agent-company had the right to technical and manufacturing information, designs and data emanating from the English company. The assessee at the relevant time was carrying on business in the manufacture of various electrical equipments and components like electric motors, etc. The manufactured items were sold entirely to the agent-company by the assessee and the agent-company in its turn effected sales in accordance with an agreement dated the 21st December, 1960, between the assessee and the agent-company. The recital of the said agreement states that the company and the agent were desirous of entering into certain arrangements relating to the manufacture and sale of goods coming within the scope of the agreement. The agreement provided, inter alia, as follows : "(1) The scope of this agreement shall be such that electrical and allied goods as may from time to time be manufactured by the company by arrangement between the company and the agents (hereinafter referred to as 'the goods'). (2) The company undertake to manufacture the goods as agreed on between the parties from time to time and supply such goods only to the agents. 3. (a) So far as they are in a position to do so the agents agree to supply to the company all manufacturing information, designs and data which they may obtain from the said Associated Electrical Industries Ltd. and which may be necessary to enable the company successfully to manufacture the goods. (b) All manufacturing information, etc., supplied by the agents to the company shall be confidential to the company and shall not in any circumstances be communicated to any other party and on the termination of this agreement, the company shall return to the agents all manufacturing information, design and data. (c) The company shall reimburse the agents any costs incurred by the agents in supplying to the company manufacturing information, drawings and assistance and undertaking tests or work of similar nature... (4). (a) The agents will place manufacturing orders on the company from time to time for their requirements of the goods...... (10) This agreement shall remain in force for a period of ten years certain from the First day of November One thousand nine hundred and sixty and thereafter either of the parties may at any time give to the other not less than twenty-four calendar months notice in writing of its intention to determine the agreement, and at the expiry, of such notice the agreement shall accordingly terminate without prejudice to any outstanding claim by either party."
(2.) For the purpose of manufacturing RW-105 and 120 H.P. squirrel cage motors the assessee obtained certain designs from the agent-company as contemplated by the aforesaid agreement. The cost of these designs and drawings and technical information came to Rs. 22,039. In the account of the assessee this amount was appropriated over a period of five years with the result a sum of Rs. 4,408, being 20 per cent. or 1/5th of Rs. 22,039, was debited this year. The assessee claimed deduction of Rs. 4,408. The Income-tax Officer held that since the information and knowledge received by the assessee in respect of these designs were of an enduring nature, the expenses were, therefore, capital, expenditure and he accordingly disallowed the expenditure.
(3.) The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that these expenses did not stand in the same footing as expenses for raw materials or even expenses of an expert for the purpose of production. These expenses had been incurred prior to production. In the circumstances, he upheld the order of the Income-tax Officer.;