COMMISSIONER OF INCOME TAX Vs. MCGAW RAVINDRA LABORATORIES INDIA LIMITED

JUDGEMENT

(1.) IN this case, at the instance of the Revenue, the following four questions have been referred to us for our opinion:

(2.) THE assessment year under reference is 1967 68, the previous year being the financial year ending on March 31, 1967. The assessee is a private limited company. It entered into a collaboration agreement with M/s McGaw Laboratories of the United States of America. Under the said agreement, the assessee company was entitled to market its products in India and two foreign countries, namely, Ceylon and Pakistan. The assessee company, however, wanted to export its products to other countries, mainly in the middle east and far east. It was, therefore, decided to depute Mr. Rohit Chinubhai to negotiate changes in the collaboration agreement so as to enable the assessee company to market its products in the middle east and the far east. The resolution to that effect was passed by the board of directors of the assessee company at its meeting held on June 22, 1966. The assessee company also decided to depute Mr. H. P. Gupta, its laboratory controller, to the collaborators' associates, M/s Dade Reagents Inc., Miami, Florida, U.S.A., for training in the manufacture of blood bank products like group sera, B. S. sera, etc. M/s Dade Reagents is a division of the American Hospital Supply Corporation. The assessee company was already manufacturing blood transfusion equipment in the form of A.C.D. solution bottles and blood administration sets. In order to complete the range of the said products the assessee company thought it necessary to produce blood plasma and reagents which are ancillary products of A.C.D. bottles and blood equipments. Mr. Rohit Chinubhai was, therefore, requested to hold discussion with M/s Dade Reagents to finalise various management and technical details. It was under these circumstances that the assessee company incurred expenditure of foreign tour undertaken by Rohit Chinubhai and H. P. Gupta. The expenditure of Rs. 23,837 was incurred for the foreign tour of Rohit Chinubhai and Rs. 15,778 for the foreign tour of H. P. Gupta. In the course of the assessment for the assessment year under reference, the assessee company claimed that the said expenditure was revenue in nature. The ITO, however, rejected the claim made by the assessee company holding that the said expenditure was capital in nature.

(3.) THE assessee company had also incurred an expenditure of Rs. 39,180 on roads, in the year of account relevant to the assessment year under reference. The assessee claimed that the said expenditure was revenue expenditure. The ITO, however, disallowed the claim of the assessee. Against the decision of the ITO, the matter was taken in appeal before the AAC, Special Range I, Ahmedabad, by the assessee. As regards the claim of the assessee company with regard to the foreign tour expenditure of Rohitbhai, the AAC held that the foreign tour undertaken by Rohit Chinubhai was for two purposes (1) to negotiate changes in the collaboration arrangement with M/s McGaw Laboratories to enable the assessee company to market its products to new territories; and (2) to negotiate an agreement with M/s Dade Reagents for setting up an altogether new business involving the manufacture of new products. The AAC held that to the extent the tour of Rohit Chinubhai was undertaken for starting the manufacture of new products, the expenditure was capital in nature, but the expenditure to the extent it was incurred for extending the assessee company's business to new territories, could not be considered to be capital in nature. He, therefore, directed the ITO to restrict the disallowance to half of the amount spent on the foreign tour of Rohit Chinubhai. So far as the foreign tour of H. P. Gupta was concerned, the AAC held that his tour was in connection with the new business which was to be started and, therefore, the ITO was justified in disallowing the foreign tour expenditure incurred for him.