1989 (3) TMI 5 - SC - Income Tax

Payments for technical know-how to improve penicillin manufacture treated as revenue and deductible under Section 37

SC allowed the appeal, holding that payments for technical know-how to improve penicillin manufacture were not capital outlays but revenue in nature. The ... Deduction under section 37 - manufacture of antibiotics and pharmaceuticals - granted a licence for the manufacture, in its plant, of the well-known antibiotic, penicillin - requisite technical know-how to achieve substantially higher levels of performance or production-- of more than 10,000 units of penicillin per milli-litre of 'cultured-broth'-- with the aid of better technology and process of fermentation and with better yielding penicillin-strains - HELD THAT:- In our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to nonpartibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. In the present case, the principal reason that influenced the option of the High Court was that the initiation and exploitation of the new process brought in their wake a new venture requiring an altogether new plant. We are afraid this view may not be justified. The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and, profitability not removed from the area of the day-to-day business of the assessee's established enterprise. Appeal succeeds and is allowed Issues Involved:1. Whether the sum of Rs. 2,39,625 paid by the assessee to Meiji was a revenue expenditure deductible under section 37 of the Income-tax Act, 1961.2. Whether there was any material before the Tribunal to hold that a completely new plant with a completely new process and new technical know-how was obtained by the assessee from Meiji.Detailed Analysis:Issue 1: Nature of Expenditure (Revenue vs. Capital)The primary issue was whether the payment of Rs. 2,39,625 made by the assessee to Meiji for technical know-how and sub-cultures of penicillin-producing strains constituted a revenue expenditure deductible under section 37 of the Income-tax Act, 1961. The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal (ITAT) all held that the expenditure was of a capital nature, as it was for acquiring an asset or advantage of enduring benefit. The High Court of Gujarat affirmed this view, stating that the expenditure was for setting up a new plant and a new process, thus creating an enduring benefit for the assessee's trade.However, the Supreme Court disagreed with this conclusion. The Court noted that the business of the assessee was the manufacture of penicillin, and the agreement with Meiji was aimed at improving the yield of penicillin from the existing plant. The Court emphasized that the technical know-how and sub-cultures were intended to enhance the efficiency and profitability of the existing business, not to set up a new venture or plant. The Court concluded that the financial outlay was for the better conduct and improvement of the existing business, making it a revenue expenditure. The Court stated, 'The answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure.'Issue 2: Material Evidence for Tribunal's FindingsThe second issue was whether there was any material before the Tribunal to hold that the assessee obtained a completely new plant with a completely new process and new technical know-how from Meiji. The Tribunal had concluded that the payment was for acquiring a new plant and process, which necessitated a new plant modeled on a pilot plant. The High Court did not find evidence to support the Tribunal's finding of a completely new plant but agreed that a new process and technical know-how were obtained.The Supreme Court found no material to support the Tribunal's finding that the assessee had obtained a completely new plant. The Court observed that the agreement with Meiji was aimed at improving the yield of penicillin using existing infrastructure. The Court noted, 'There was no material for the Tribunal to record the finding that the assessee had obtained under the agreement a 'completely new plant' with a completely new process and a completely new technical know-how from Meiji.' The Court emphasized that the agreement pertained to the improvement of the existing business operations and did not necessitate a new plant.Conclusion:The Supreme Court allowed the appeal, holding that the sum of Rs. 2,39,625 was a revenue expenditure deductible under section 37 of the Income-tax Act, 1961. The Court also concluded that there was no material to support the Tribunal's finding that the assessee obtained a completely new plant with a completely new process and new technical know-how from Meiji. The judgment of the High Court was set aside, and the questions of law were answered in favor of the assessee and against the Revenue. The appeal was allowed with no order as to costs.