Contractual payment for trade-mark rights and know-how is revenue expenditure where no enduring capital asset is created.

A contractual payment made to secure trade-mark rights, technical know-how and distributorship benefits was held to be revenue expenditure because it was incurred to facilitate business operations and did not create an enduring capital asset or permanent advantage. The fact that the sum was described as meeting initial distributorship expenses did not change its character, since the payment was a stipulated condition of the agreement and the distributorship was co-terminous with the seven-year arrangement. The amount was therefore allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, and the reference was answered in favour of the assessee.

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Issues: Whether the sum of Rs. 50,000 paid to the distributors as part of the agreement for securing trade-mark rights, technical know-how, and distributorship arrangements was capital expenditure or revenue expenditure deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The payment was a stipulated condition of the agreement under which the assessee obtained the use of registered trade marks and access to technical practices and specialised processes. The distributorship arrangement was co-terminous with the seven-year agreement and did not create any asset or advantage of a permanent character beyond that period. The mere fact that the amount was described as meeting the initial expenses of establishing the distributorship did not alter its character in the hands of the assessee, because the payment was made to secure the commercial benefits flowing from the agreement and not to bring into existence a capital asset. The principle applied is that expenditure incurred to facilitate the carrying on of business and earning of profits, without creating an enduring capital advantage, is revenue in nature.

Conclusion: The expenditure of Rs. 50,000 was revenue expenditure and was allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922; the answer to the referred question was in the negative and in favour of the assessee.

Ratio Decidendi: A payment made as a contractual condition for obtaining business its such as trade-mark rights and technical know-how, where no enduring capital asset or permanent advantage is created, is revenue expenditure deductible in computing business income.

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