Sankar Prasad Mitra, J. - (1.) The assessment year is 1959-60 for which the previous year ended on the 31st July, 1958. The assessee is a public limited company. It carries on the business of manufacture and sale of certain electrical goods. On the 21st May, 1956, the assessee entered into an agreement with Messrs. Simplex Electric Company Ltd. of England (hereinafter sometimes called the " foreign company "}. By this agreement the assessee acquired certain rights to manufacture and sell in India products of " Simplex " design and to use the trade name " Simplex " on the terms and conditions therein mentioned. Some of the clauses of this agreement which the Tribunal has quoted in the statement of the case are as follows : "Clause 3(a).--HGEC shall be liable to pay ' Simplex ' the cost (including freight, transport and insurance costs) of preparing and providing prints, designs, drawings, specifications, instructions and other information as aforesaid and of supplying patterns and tools upon invoices in respect thereof being submitted by ' simplex ' to HGEC. HGEC shall also pay to ' Simplex ' a fee at the rate of 500 per annum (payable annually in advance, the first payment to be made within one month from the date hereof and thereafter on the first day of each year of this agreement), towards the salary of the members of the staff of 'Simplex' appointed for the purposes of paragraph (d) of Clause 2 and sums equivalent to the salaries or other remunerations of any persons sent as production engineers or technical advisers for the purpose of paragraph (e) of Clause 2 during their absence from England and all travelling and living expenses incurred by them during such absence, payments of such sums to be made promptly upon the same being invoiced by ' Simplex ' to HGEC." " Clause 5(a).--Simplex will file and prosecute with due diligence an application for registration of HGEC as the registered user of the trade mark in respect of 'Simplex' products and HGEC shall do all such acts and execute all documents necessary for enabling 'Simplex' to obtain registration but in order that the validity of the registration by ' Simplex ' of the trade mark or any other trade mark bearing or using the word 'Simplex' shall not be prejudiced by appearing in the market within India of ' Simplex ' products manufactured by HGEC no use shall be made of the said mark by HGEC until registration of HGEC as the registered user thereof shall have been completed. " " Clause 5(g).--Nothing herein contained shall affect, prejudice or derogate from the full right of ' Simplex ' either, (i) to use the trade mark in India upon or in relation to any goods for which it is the registered proprietor of such trade mark or upon or in relation to any goods on which it has heretofore used this trade mark in India, or (ii) to authorise another manufacturer thereof in so far as provided for in this agreement to make use of the trade mark as registered user thereof. " " Clause 5(h).--HGEC shall not manufacture or assemble ' Simplex ' products upon or in relation to which the trade mark is used save in accordance with such standards of quality and specifications as are acceptable to ' Simplex' in so far as those specifications are not at variance with specifications of the Indian Standard Institute and ' Simplex * is hereby empowered to withdraw the use of the trade mark from any products which it reasonably considers to be below standard and HGEC fails to manufacture in accordance with the standard of equality and specifications of ' Simplex ' in spite of being called upon to do so. " " Clause 5(j).--HGEC shall not at any time hereafter do any act or thing which may in any way prejudice or harm the registered proprietorship of ' Simplex ' in India of the trade mark and it will at the request and cost of 'Simplex' do all such things and take all such steps as 'Simplex' may reasonably require to protect or assist in the protection of the registration of ' Simplex ' as proprietor of the said trade mark in India including the carrying out of all requirements governing the manner of use of the trade mark or the indications to be given of the position of HGEC and/or ' Simplex ' with respect to the trade mark on the ' Simplex ' products that ' Simplex ' may from time to time direct. " "Clause (5(6).--If HGEC has not started to manufacture or fails or is unable or unwilling to meet or fulfil the demand in India for the ' Simplex ' products or any of them in spite of ' Simplex ' making available to HGEC all information, drawings, specifications and technical advice in terms of Clause 2 above, ' Simplex ' may either, (i) itself sell or supply such products to any person, firm or company in India, or (ii) be free to make arrangements (including the provision of services and information similar to those herein provided) for the manufacture and sale of such products in India by persons, firms and companies other than by HGEC PROVIDED that in the latter eveat 'Simplex' shall first give notice in writing to HGEC of its intention to make such arrangements for the manufacture of such products in India and if after receipt of such notice as aforesaid HGEC shall satisfy ' Simplex ' that it will within a reasonable time manufacture sufficient quantities of such products to meet the demand therefor ' Simplex ' shALL not proceed with such arrangements. Subject as aforesaid ' Simplex ' shall not at any time during the continuance of this agreement sell or supply to any person, firm or company in India the ' Simplex ' products ". " Clause 9(a).--In consideration of the rights, services and facilities agreed to be granted by ' Simplex ' to HGEC under this agreement, HGEC agrees to remunerate ' Simplex' in addition to the payments provided by Clause 3(a) by paying to ' Simplex' a royalty on ' Simplex ' products manufactured by HGEC during the continuance of this agreement, as follows : (i) 250 volt domestic type switch and distribution gear (existing design): 21/2 per cent. (ii) 250 volt switch and distribution gear (future designs) : 5 per cent. (iii) All domestic wiring accessories of Miniac range and their industrial ironclad equivalents : 2 1/2 per cent. (iv) Regent switch and distribution gear, Monarch rsnge of switches and switch fuses, Regent busbar chambers and sealing chamber, connection boxes : 5 per cent. (v) Lighting fittings of Simplex manufacture, as at present listed : 31/2 per cent. (vi) Lighting fittings of specialised design by way of future additions : 5 per cent. (vii) Flame proof equipments: 5 per cent. (viii) Special type of Simplex accessories (formerly Lundberg accessories), e.g., Marvel switch, series and paralled switches, door switches, Runlex and motor starter switches, etc : 5 per cent. (ix) Conduit fittings and accessories : 21/2 per cent. (b) The royalty will be calculated on the net ex-factory prices as invoiced by HGEC to customers on sales of ' Simplex ' products effected by HGEC from day to day. (c) Payments of royalty shall become due every half year ending on 31st January and 31st July and shall be credited by HGEC to the account of ' Simplex ' not later than 60 days from the end of each such half year and HGEC shall notify ' Simplex ' in writing when each such credit is made and the amount so credited. The amounts so credited shall carry interest at 4 per cent. per annum from that date. Payments of amounts credited to the account of 'Simplex ' and/or interest thereon shall be effected by HGEC to ' Simplex ' in England in U. K. Sterling, in accordance with instructions given from time to time by notice in writing, from ' Simplex' to HGEC. The rate of exchange for Indian currency to U. K. Sterling will be the official rate of the Reserve Bank of India on the date remittances are due to be made in accordance with such instructions. (d) During the currency of this agreement HGEC shall maintain full and accurate records of production and sales of ' Simplex ' products and billing of the same to ' Simplex ' quarterly within thirty days after the last day of January, April, July and October of each year detailed reports of manufacture and sales of ' Simplex ' products covered by this agreement, and to permit' Simplex's ' duly authorised representative to inspect such records from time to time. (e) ' Simplex ' shall have the option by notice in writing to HGEC at any time and from time to time to apply for ordinary shares in the capital of HGEC for cash at par and to apply the whole or part of the amount for the time being standing to the credit of ' Simplex ' in the said account in meeting snath subscription money provided-that 'Simplex' may not apply and subscribe for ordinary shares of a nominal amount in excess of the total amount for the time being credited to it as aforesaid and that the total number of ordinary shares of HGEC held by ' Simplex ' at any time shall not exceed 49% of the issued ordinary shares of HGEC for the time being. Upon ' Simplex ' exercising its option to apply for and subscribe any ordinary share pursuant to this provision HGEC shall forthwith allot and issue the same and deliver to ' Simplex ' a share certificate in respect thereof and shall debit the said account of ' Simplex ' with the amount of such subscription moneys. During the continuance of this agreement HGEC shall accordingly not issue any ordinary shares or other shares ranking pad passu as to voting or otherwise with ordinary shares of HGEC without the prior consent of ' Simplex ' and without first offering to ' Simplex' on the same terms a part of such additional share capital proportionate to the number of shares for the time being held by ' Simplex.' " " Clause 12.--This agreement may be determined at any time by ' Simplex ' upon giving notice in writing to HGEC to that effect : (i) If HGEC shall fail to effect any payment of royalties or other moneys within 28 days of the date upon which the same shall be due to be paid to ' Simplex ' in accordance with the provisions of this agreement; (ii) If HGEC shall commit any other breach of its obligation under this agreement and shall not remedy such breach within 30 days after receipt of a notice in writing from ' Simplex' requiring the same to be remedied; (iii) If HGEC shall be placed in liquidation whether voluntary or compulsory (other than voluntary liquidation for the purpose of construction or amalgamation) or shall suffer the appointment of a receiver of its assets or undertaking or any part thereof or shall make any assignment or composition for the benefit of its creditors or be placed under judicial management or cease to carry on the business of manufacturing ' Simplex ' products ; (iv) If the registration of HGEC as registered user of the trade mark shall be cancelled for any reason ; (v) If the said approval of the Government of India shall be withdrawn, revoked, cancelled or modified in any way. "
(2.) During the previous year the assessee paid to the foreign company Rs. 5,360 for the cost of preparing and providing prints, designs, drawings, specifications, instructions and other information in terms of Clause 3(a) of the agreement. The assessee also paid a sum of Rs. 13,938 under Clause 9(a) of the agreement being royalty based on specified percentages. The Income-tax Officer allowed a deduction of Rs. 5,360 but disallowed the claim for deduction of Rs. 13,938 on the ground that it represented expenditure of a capital nature.
(3.) The Appellate Assistant Commissioner held that the expenditure of Rs. 13,938 depended upon production and did not bring into existence any assets of an enduring nature. He allowed the sum of Rs. 13,938 as deduction in computing the assessee's business profit.;