Revenue expenditure for technical know-how allowed, but litigation cost deduction denied absent proof of assessee's own liability.

A payment made under a business agreement for the limited use of technical know-how, scientific data, patents and trade marks during the agreement term was not expenditure on scientific research carried on by the assessee and did not fall under section 10(2)(xii) of the Income-tax Act, 1922. It was nevertheless allowable as revenue expenditure under section 10(2)(xv) because it did not create an enduring asset and formed part of the profit-earning process. A separate claim for contribution towards patent infringement litigation costs failed because the assessee had not shown that the liability was its own business liability under the relevant arrangement.

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Issues: (i) Whether the payment made under the agreement dated 17 December 1947 was deductible as expenditure laid out or expended on scientific research relating to the business under section 10(2)(xii) of the Income-tax Act, 1922, and, failing that, whether it was deductible under section 10(2)(xv); (ii) Whether the contribution towards litigation expenses for the patent infringement suit was an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922.

Issue (i): Whether the payment made under the agreement dated 17 December 1947 was deductible as expenditure laid out or expended on scientific research relating to the business under section 10(2)(xii) of the Income-tax Act, 1922, and, failing that, whether it was deductible under section 10(2)(xv).

Analysis: The payment was made under an agreement under which the foreign company retained ownership of its research results, patents and trade marks, and the assessee received only the right to use the technical knowledge, scientific data and intellectual property for the conduct of its business during the currency of the agreement. The expenditure was not for scientific research carried on by the assessee, nor on its behalf or at its instance, and therefore did not fall within section 10(2)(xii). At the same time, the payment did not bring into existence any asset or advantage of an enduring nature. It was incurred to obtain technical assistance and know-how for running the business during the term of the agreement and was an integral part of the profit-earning process.

Conclusion: The payment was not deductible under section 10(2)(xii), but it was allowable in full under section 10(2)(xv), in favour of the assessee.

Issue (ii): Whether the contribution towards litigation expenses for the patent infringement suit was an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922.

Analysis: The liability for sharing the litigation costs arose under an earlier agreement between other parties, and there was no finding that this liability had become that of the assessee before the transfer of the pharmaceutical business. The later agreement only required assistance in defending patents and trade marks and did not expressly transfer or create a retrospective obligation to bear the suit expenses. On the materials found, the expenditure was not shown to be the assessee's business liability.

Conclusion: The claim was not allowable under section 10(2)(xv), in favour of the revenue.

Final Conclusion: The reference was answered partly for the assessee on the deductibility of the technical and research payment, but the litigation expense claim was disallowed.

Ratio Decidendi: A payment made for the limited use of technical know-how, patents and trade marks during the currency of a business agreement is revenue expenditure if it does not create an enduring asset, but a liability for litigation costs is deductible only when it is shown to be the assessee's own business liability.

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