TaxTMI 
TaxTMI 
1974 (2) TMI 7
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....The first is an agreement dated October 5, 1960, entered into by the assessee with Alfred Wiseman & Co. Ltd., Birmingham, and the second is an agreement dated October 7, 1960, entered into by the assessee with Spencer (Melksham) Ltd., Wiltshire. For the purposes of this reference, it would be necessary to set out only such terms of each of the said agreements as have a material bearing on the question under consideration and we proceed to do so. By the first agreement, Alfred Wiseman & Co. Ltd. agreed : (a) to grant to the assessee full and exclusive licence and authority to manufacture in India the complete range of Wiseman's Worm Reduction Gear Units up to 10 1/3 size for a period of ten years and, thereafter, until terminated by either giving to the other twelve months' notice in writing to that effect ; (b) to supply to the assessee all existing and up-to-date drawings and information (without cost) and patterns (at cost) which might be required by the assessee for the purpose of such manufacture ; (c) to train in the production of the Worm Reduction Gear Units of the type and range covered by the agreement two engineers employed by the assessee for a period of six months with....
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.... person other than the assessee with a view to enabling such other person to manufacture the said Idlers in India. The assessee, in consideration of these and other benefits received under the agreement, undertook : (a) to pay free of Indian tax the sum of ten thousand pounds to Spencer (Melksham) Ltd. in two instalments, one instalment of five thousand pounds immediately on the approval of the Government of India being obtained and the other instalment of five thousand pounds within twelve months from the date of obtaining of such approval ; and (b) to incorporate the word " Spencer " in the description of the Idlers manufactured by it and to engrave or otherwise mark upon the same the said word. The total amount paid by the assessee to the foreign collaborators under the aforesaid two agreements came to twenty-four thousand pounds, that is, Rs. 3,20,567. The amount was duly paid by the assessee and it received from the two foreign collaborators patterns, drawings, manufacturing and engineering data and information necessary for the manufacture of the two articles in question. It appears, though this is not very clear from the record, yet further technical know-how was also acqui....
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....iation allowance and, secondly, that drawings, specifications and patterns acquired by the assessee from its foreign collaborators were not " plant " within the meaning of section 32. A subsidiary contention was also raised to the effect that even if drawings and information received by the assessee from Alfred Wiseman & Co. Ltd. were treated as assets, under the terms of the agreement the assessee was a mere licensee who was permitted to make use of the same during the tenure of the licence and that as such the assessee could not be said to have owned the said assets and, therefore, the assessee was not entitled to claim any depreciation allowance in respect thereof. The Tribunal observed that the assessee was right in not seriously contending that the expenditure incurred on the acquisition of designs, patterns and information was revenue expenditure and found as a matter of fact that the expenditure in question was capital in nature. The Tribunal also found that the assessee was entitled to raise a new claim for depreciation allowance in respect of drawings, patterns and information received by it from the foreign collaborators at the second appellate stage. These two findings o....
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....e ascertained with certainty, it was not possible to dispose of the appeals before it on merits. The Tribunal, therefore, remitted the matter to the Appellate Assistant Commissioner with a direction to give an opportunity to both the parties to lead proper evidence on the point and " to give deduction on account of depreciation allowance according to law on the amount found to have been spent by the assessee in obtaining these drawings and patterns and to complete the assessment on that basis. " The revenue, feeling aggrieved by the decision of the Tribunal, made two applications under section 256(1) of the Act requiring the Tribunal to refer to this court the questions of law arising out of its orders made in the two appeals. Tile Tribunal has thereupon made a consolidated reference and referred to this court the following question of law : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to depreciation allowance on any part of the expenditure incurred by it by virtue of the agreements entered into by the assessee with Messrs. Alfred Wiseman & Co. Ltd. and Messrs. Spencer (Melksham) Ltd.? " Though th....
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....f section 34, be allowed- . .............. " " 43. Definitions of certain terms relevant to income from profits and gains of business or profession.--In sections 28 to 41 and in this section, unless the context otherwise requires,- ........ (3) 'plant' includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession ;... " On an analysis of the opening part of section 32, it would appear that (sic) a deduction on account of buildings, machinery, plant or furniture, (ii) owned by the assessee and used for the purposes of his business or profession, (iii) subject, however, to the provisions of section 34. If these three conditions are satisfied in respect of any asset the assessee would be able to avail himself of the benefit of depreciation allowance. The question arising in this reference will have to be decided against the background of this legal position. We will first consider the question whether drawings and patterns acquired by the assessee are " books ", for the inclusive definition of the word " plant " in section 43(3) of the Act expressly declares that " books " used for the purposes of the business or ....
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....fore, it would appear that a book within the meaning of section 43(3) must be an object or article which must satisfy a dual test ; it must bear both physical and functional characteristics of a book. It must be a collection of a number of sheets of paper or of other substance, having suitable size, shape and value, bound together at one edge so as to form a material whole and protected on the front and back with covers of some kind and functionally useful to the assessee for carrying on his business or profession. Counsel appearing on both the sides made reference to decided cases with a view to explaining the true meaning of the word " book ". The decisions in three of the cases cited, namely, Schove v. Schmincke, Davis v. Benjamin and Veerabrahmam v. State turned upon the definition of the work " book " in the status with which the courts were there concerned. These decisions cannot, therefore, be of any assistance in deciding the case in hand in which the plain and natural meaning of the word " book " is to be ascertained. We do not, therefore, propose to make further reference to those decisions. In Willis v. Curtois the question as to what the word " book " meant arose in t....
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.... the great probability is, the testator, if his attention had been drawn to them, would have passed those books by specifically naming them, I think (the words being sufficient), I must consider that those books passed under that clause. " There was no dispute in that case that the manuscript journals were books presumably because they had all the physical characteristics of a book. The only controversy was whether books of that nature, which consisted of loose sheets of memoranda bound together for the convenience of the testator and for easy consultation, could be called books since they were not like ordinary printed books sold at a bookstall. That argument was negatived principally on the ground that the journals in question were bequeathed to a person to whom, having regard to his profession, they might be of value and as such they passed to him under the relevant clause of the will. This decision proceeds more or less on the functional or utility test in judging whether a particular article is book and only to that extent it is relevant for the purposes of the present case. In Pretyman v. Pretyman, the question of construction of the word " book " again arose in the followi....
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....lumes are in book form ; to the outward eye they look like books, and in the ordinary course they can be, and are, handled like books. Next, I observe that they can be used like books, in the sense that, as one turns over the sheets, one can, if able to decipher the handwriting, read the various letters as a collection of letters bound up in the books. I observe further that they are not detachable letters in the ordinary sense, but have been so inserted in the sheets that they are in substance permanent parts of the volumes, unless, indeed, they should be cut out or removed by some forcible effect. " It would appear that in reaching the conclusion that the manuscript letters and papers before him were books in the true sense of the word, Maugham J. Principally relied upon the factors that they in substance formed permanent parts of volumes from which they could not be removed except by forcible effort, that in their appearance they looked like books and were capable of being handled like books. The emphasis here was primarily and mainly on the physical characteristics of book and the test which was applied was whether the articles in question were so held together as to form part....
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....lar article or object is book within the meaning of section 43(3) of the Income-tax Act, 1961, and to that extent the decisions cited support our view. The next question which must necessarily arise for consideration is whether drawings and patterns acquired by the assessee satisfy the aforesaid dual test and it is here that the real difficulty arises in the present case. We will, for the purposes of this point, assume in favour of the assessee---indeed on that point there is a finding of fact recorded by the Tribunal---that drawings and patterns satisfied the functional test since they formed " the basis " of the assessee's business of manufacturing Worm Reduction Gear Units and Conveyor Idlers. The real difficulty, however, arises in regard to the satisfaction of the other test. In the statement of the case, the Tribunal has not stated material facts or its conclusions on material facts which would enable us to hold that drawings and patterns in question were in a book form and possessed the physical characteristics of a book. In the absence of such material, the question referred to us cannot be answered, one way or the other, by confining one's attention only to the inclusive ....
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.... (vi) electrical fans and other office appliances, Sundaram Motors Pvt. v. Commissioner of Income-tax ; (vii) poles, cables conductors and switch boards for distribution of electricity, Commissioner of Income-tax v. Indian Turpentine and Rosin Co. Ltd. ; (viii) light-fittings, ceiling and pedestal fans and water-pipe fittings in hotel, Commissioner of Income-tax v. Jagadeeschandran & Co. ; (ix) sanitary and pipeline fittings in a hotel, Commissioner of Income-tax v. Taj Mahal Hotel. NOT PLANT : (i) Horse, London and Eastern Counties Loan and Discount Co. v. Creasey ; (ii) stallion (used to serve mares), Earl of Derby v. Aylmer ; (iii) bed of a river, Dumbarton Harbour Board v. Cox ; (iv) solicitor's law books, Daphne v. Shaw ; (v) water tower, Margrett v. Lowestoft Water & Gas Co. ; (vi) electric lamps fittings in a tea shop, J. Lyons & Co. Ltd. v. Attorney-General ; (vii) human body, Norman v. Golder ; (viii) wallpaper pattern books, Rose & Co. (Wallpaper & Paints) Ltd. v. Campbell ; (ix) designs for wallpaper and furnishing fabrics, McVeigh v. Arthur Sander son & Sons Ltd ; and (x) water storage tank used for storing water by the supplier thereof for irrigation purposes, Jayasi....
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.... Act : but, in its ordinary sense, it includes whatever apparatus is used by a businessmen for carrying on his business,--not his stock-in-trade which he buys or makes for sale ; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business " : see Blake v. Shaw. This wide definition sets out in simple words, both positively and negatively, the essential features of plant and accordingly anything which is used for trading purposes, other than the stock-in-trade, would be plant provided it is kept for permanent employment. Next in point of time is the decision in J. Lyons & Company Ltd.'s case. The question for consideration there was whether electric lamps and fittings used for lighting a tea-shop could be properly described as " plant " within the meaning of section 103(5) of the War Damage Act, 1943. In that section, the word " plant " was used throughout as part of the phrases " plant or machinery " and " machinery and plant ". Uthwatt J., who decided the case, held in the first place that circumstances did not have " the effect of confining the meaning of the word to such plant as is used for mechanical operations or proce....
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....de which comes and goes, and I do not think that he meant that only very long-lasting articles should be regarded as plant. But the word does, I think, connote some degree of durability, and I would find it difficult to include articles which are quickly consumed or worn out in the course of a few operations. There may well be many borderline cases, but these articles have an average life of three years, and if their cost can fairly be called capital expenditure I cannot refuse to them the description of ' plant ' unless the Act discloses some special reason for doing so. " Lord Tucker concurred in the view of Lord Reid and said that he adopted that reasoning and did not desire to add anything thereto. Lord Keith of Avonholm held that the articles in question could " quite properly be described as among the plant to be provided for a similar business set up for the first time, and their replacements must, I think, continue to be plant ". Lord Denning in his speech stated : " These machines are undoubtedly plant. They are plant used by the manufacturers in the factory. Each of the machines---each mechanical cobbler--is part of the plant. The knives and lasts too are part of the pl....
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....the " setting " in which the businesses were carried on. A subsidiary contention was that " plant " would only comprise an apparatus or instrument used in carrying out the actual operations of the trade, that is, such parts of the equipment of the works as perform something more than a passive role. Ormerod L.J., who delivered the leading judgment, referred to the definition of the word " plant " given in Yarmouth's case and described it as the " best known... and most generally invoked ". He then referred to the qualification engrafted on it by Uthwatt J. in J. Lyons & Co. Ltd.'s case and observed that Lord Reid in Hinton's case must be taken as having approved of the definition of the word " plant " as given by Lindley L.J. with the qualification superimposed thereon by Uthwatt J. Dealing with the principal contention of the revenue, he observed : " The dividing line between what is " plant " and what is not is a narrow one, and the facts of this particular case come near to that dividing line. But, in my judgment, in the circumstances of this case---and I think each case does depend largely on its own circumstances---the partitions should be regarded as something more than a me....
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.... the partitioning is part of the premises in which the business is carried on, or part of the plant with which the business is carried on. Either view could have been taken ...... I think the Commissioners have, in effect, preferred the second view, and it cannot be said that there was no evidence to support it, or that any error of principle was involved. " This decision is important from two points of view ; first, the function performed by the partitions and their utility in the trading activity of the assessee were taken as the guiding test and, secondly, it laid down that even if there be a recognizable distinction between the passive and active role which an asset can play in the accomplishment of the trading purpose, as an asset which plays a merely passive role would not be any the less plant. The illustration given in the judgment of Donovan L.J. of heating air-conditioning and water softening installations which involve no moving machinery effectively demonstrates this point. We may then make reference to the decision of the House of Lords in Inland Revenue Commissioners v. Barclay, Curle & Co. Ltd. The main question in that case was whether a dry dock was plant within ....
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....ed from the view taken by the other Law Lords and since the opinion expressed by them represents the minority view, it is not necessary to refer to their speeches in detail. This decision is important in so far as it again approves of the definition of plant in Yarmouth's case and adopts the same " functional test " which was adopted in Jarrold's case for the purpose of deciding whether a particular apparatus or article is " plant " for the purposes of the assessee's business. The dry dock was held to be plant by application of the test as to what role it played or operation it performed in the trader's business. It is significant in this connection to note that Lord Donovan read the classic definition in Yarmouth's case as itself laying down the functional test. Coming now to the Indian decisions dealing with the interpretation of the word " plant ", reference must be made first to the decision of the Supreme Court in Commissioner of Income-tax v. Taj Mahal Hotel. This decision is important for our purposes since it interprets the word " plant " in the context of a cognate provision, namely, section 10(2)(vib) of the Indian Income-tax Act, 1922, which dealt with allowance of a su....
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....t the meaning of the word " plant " was confined to an apparatus used in mechanical or industrial business or manufacture of finished goods from raw goods. The Supreme Court then approvingly referred to the decision in Jarrold's case and particularly adverted to the decision of Donovan L.J. in that case and the illustrations given by him of assets such as heating, air-conditioning and water softening installations which were held to fall within the meaning of the word " plant " although they played a passive role. The Supreme Court then considered the function which sanitary and pipeline fittings performed in a hotel and observed : " If the partitions in Jarrold's case could be treated as having been used for the purpose of the business of the trader, it is incomprehensible how sanitary fittings can be said to have no connection with the business of the hotelier... We are unable to see how the sanitary fittings in the bath room in a hotel will not be 'plant' within section 10(2)(vib) read with section 10(5) when it is quite clear that the intention of the legislature was to give it a wide meaning and that is why articles like books and surgical instruments were expressly included ....
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.... more of such machinery and plant so that they could be an aid to the developing economy of our country. " It is true that in that case the word " plant " had to be construed in the context of development rebate. Those observations would, however, apply with equal force while interpreting the word " plant " in relation to depreciation allowance since all these deductions are granted on commercial principles and plant is intended to be given the same meaning in both the sections (vide section 43(3)). In Commissioner of Income-tax v. Indian Turpentine & Rosin Co. Ltd., the question again was whether electrical installations such as poles, cables, switch-boards, etc., were plant on which development rebate could be allowed. The court observed : " The definition of plant contained in sub-section (5) of section 10 is very wide. The term 'plant' includes such articles as books and scientific apparatus. There should, therefore, be no difficulty in treating poles, cables, conductors and switch-boards for distribution of electricity as plant within the meaning of clause (vib) of section 10(2) of the Act. " This decision has its importance since it was specifically referred to and approv....
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....hat there is a close parallel between this decision and the decision of Finlay J. in Margrett v. Lowestoft Water and Gas Company's case, where a water tower constructed for the purpose of increasing the pressure of supply of water to certain parts of a town was held not to be plant mainly on the ground that it was no more than a structure and as such it could not also be plant and that it was not enough, in order that it may qualify as plant, to show that it was used in a particular way. This decision was expressly overruled in Barclay's case by Lord Guest and Lord Donovan (at pages 747 and 752 respectively) and its reasoning and ultimate conclusion were disapproved by Lord Reid (at page 741) by applying the functional test. It appears to us, therefore, that this decision must be taken as no longer good law and cannot be of any assistance. On reviewing these authorities, a board consensus emerges from which the essential characteristics of plant can be clearly gleaned. The word " plant ", in its ordinary meaning, is a word of wide import and in the context of section 32 it must be boardly construed. It includes any article or object, fixed or movable, live or dead, used by a busin....
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....". [see clause 2 of the Spencer (Melksham) agreement] (underlining supplied for emphasis). The Tribunal has also found as a matter of fact that drawings and patterns formed " the basis of the business of manufacturing the machinery in question ". It is true that they by themselves do not perform any mechanical operations or process or that on the commencement of the production of Gears and Idlers it might not be necessary to consult them or that owing to technological advances they might in course of time become obsolete. These factors, however, cannot militate against their being plant since they are, as it were, the basic tools of the assessee's trade having a fairly enduring utility. We are, therefore, inclined to agree with the Tribunal that drawings and patterns are plant within the meaning of section 32. Before we proceed further, however, we must take notice of two decisions in which question similar to the one under consideration was directly in issue in relation to articles of analogous nature and where a different view was taken. The first is the decision in McVeigh v. Arthur Sanderson & Sons Ltd. One of the questions there was whether designs used in the manufacture of ....
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....ction of the chattel in judging whether it was plant. He then said that the taxing authorities had attributed the right meaning to the word " plant " and that, on the facts of the case before him, their conclusion that pattern books did not constitute plant was a reasonable one. Now, it would appear in the first place that the decision in so far as it held that pattern books were not plant is clearly obiter. Secondly, it is expressly confined to the facts of the case and appears to have been founded, inter alia, on the ground that the durability test was not satisfied. The functional test appears to have been applied but is found not to have been satisfied on the facts of the case. The discussion on the whole is too brief to throw any light on the larger question. In our opinion, having regard to the above factors, this decision too is not of much help and is in any case clearly distinguishable. The learned Advocate-General appearing on behalf of the revenue, when confronted with this position, adopted an alternative line of reasoning. He contended that plant within the meaning of section 32 must be a capital asset of tangible nature and that such capital asset must be subject to ....
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....me way as depreciation was allowed on capital. The said claim was negatived by the income-tax authorities and, on reference, by the High Court. The Supreme Court also refused to uphold the claim, inter alia, on the ground that " no such depreciation could be claimed because no tangible asset had been acquired by the expenditure which could be said to have depreciated ". Now, it is true that this ruling does support the revenue in so far as it indicates that to sustain a claim for depreciation allowance the assessee must show that the expenditure incurred by him resulted in the acquisition of a capital asset of tangible nature and that such capital asset was capable of depreciation. The decision, however, is not of much assistance in deciding the precise questions raised for our determination, namely, (i) whether drawings and patterns, which are merely the material vehicle or physical record of know-how (that being the real asset of intangible nature acquired by the assessee) could be held to be plant, and (ii) whether depreciation can be allowed in respect of such asset which did not diminish in value year after year by wear and tear. In the case before the Supreme Court, the expen....
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....is clearly audible and to that extent it erodes the persuasive value of this decision in Daphne's case. That apart, it appears to us that the real basis of that decision was that books were not plant since they were not used as " implements in the direct sense of the word ". The real emphasis appears to have been on the lack in books of the characteristics of implements such as the tools of an artisan or moving parts of a machine and on the passive role it played in the profession of the taxpayer. The decision is, therefore, clearly distinguishable. In Jeffrey v. Rolls-Royce Ltd. the assessee-company, which was engaged in the manufacture of aero-engines, had acquired a fund of technical knowledge and experience (commonly called know-how) in regard to the design and manufacture of aircraft engines. Between 1946 and 1953, the company entered into a number of agreements with foreign governments and companies under which it agreed to supply to them a very large number of drawings and other technical information relevant to the manufacture of aero-engines and to grant them licence to manufacture those engines. It also agreed to the interchange of staff with the end in view of imparting....
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.... part, though not the whole of it, finds its material record in all those lists, drawings and manufacturing and engineering data that are specified in the various licence agreements. It is fundamental to the company's case that we should categorise this asset as being part of its fixed capital. Indeed, its argument proceeds from the premise that it is fixed capital. This, I think, is to start from too assured a base. An asset of this kind is--I am afraid that I must use the phrase--sui generis. It is not easily compared with factory or office buildings, warehouses, plant and machinery, or such independent legal rights as patents, copyright or trade marks, or even with goodwill. 'Know-how' is an ambience that pervades a highly specialised production organisation, and, although I think it correct to describe it as fixed capital so long as the manufacturer retains it for his own productive purposes and expresses its value in his products, one must realise that in so describing it one is proceeding by an analogy which can easily break down owing to the inherent differences that separate 'know-how' from the more straightforward elements of fixed capital. For instance, it would be wrong....
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...., in the course of carrying on of its trade of engineering manufacturers, acquired a fund of specialised knowledge, information and technique in engineering processes. In 1949, 1950 and 1952 it entered into three agreements under which it, inter alia, undertook to grant licence for manufacture of some of the articles designed and developed by it and to impart manufacturing technique, engineering data and other specified information (compendiously known as know-how) to the licensees and, in consideration thereof, the assessee received specified lump sum payments. These receipts were taxed as trading receipts and the matter ultimately went to the House of Lords. Viscount Radcliffe said that the case was fully covered by the principle of the decision in Rolls-Royce's case and proceeded to observe : The other point is that 'know-how', though very naturally looked upon as part of the capital equipment of a trade, is a fixed asset only by analogy and, as it were, by metaphor. The nature of receipts from it depends essentially, I think, upon the transaction out of which they arise and the context in which they are received. Whereas, in Evans Medical Supplies Ltd. v. Moriarty " know-how "....
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.... its recipient for value and the question here is whether know-how in the purchaser's hands is a tool of his trade so as to qualify as plant. All the observations in those two cases cannot, therefore, be applied wholesale in such a different situation, which is really the converse of that which was obtaining in those cases. That apart, even according to those observations know-how is a kind of asset the category and characteristic of which changes according to the use to which its owner himself decides to put it. It would be, as it were, an item of fixed capital so long as the owner retains it for his own purposes and expresses its value in his own products and earns profits by the sale of such products. Accordingly, in the hands of the recipient of know-how also, it would be in a sense a vital part or element of his capital equipment so long as he exploits it for making goods for sale at profit. In the present case, the assessee has acquired the know-how only for such a purpose and, therefore, it can be correctly described as an item of his fixed capital asset. It is true that Lord Radcliffe-and he alone said in those cases that know-how is an intangible asset and that it should....
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....ch he receives. Unlike the owner of the know-how, it has no formless existence for the recipient who gains access to it primarily through its material record. For him, know-how and its medium form a single entity and in his case to make a distinction between the two would be to ignore the reality. It appears to us, therefore, that so far as the assessee is concerned, designs and patterns can be equated with the know-how itself and as such it cannot be said that such know-how is an intangible asset and, therefore, not plant. There is yet another way of looking at the matter. It cannot be disputed that the legislature has intended to give a wide meaning to the word " plant " in section 32. Section 43(3) specifically declares that articles like books are also included in the definition of " plant ". Now, what are books ? Are not certain books, in a sense, the physical record of know-how? Take, for illustration, a standard book in the field of medicine, science or engineering. What is it other than the condensation of a life-time of work in any one of these fields and the material record of research, experience and experimentation in such field ? It might have been written for the pu....
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.... The underlined words in the extracted portion on the contrary indicate that the word is to be understood in a commercial sense and that in estimating the life period of an asset, all known facts and future probabilities must be taken into account. We shall presently show that in a commercial sense the word " depreciation " has not the limited meaning for which the revenue contends and that wear and tear is not the only relevant factor in judging the life-span of a capital asset. The Canadian decision does not, therefore, support the revenue. Counsel for the revenue also relied upon the decisions in Earl of Derby v. Aylmer and Norman v. Golder, where stallion in one case and taxpayer's body in the other were held not to be plant on which depreciation could be claimed because it was found that they did not diminish in value after an year by reason of wear and tear during the year. Now, one must bear in mind that those decisions were based on the peculier language of the statutes with which the courts were there concerned. Take, for illustration, the case of Earl of Derby. The deduction in that case was claimed under section 12 of the Customs and Inland Revenue Act, 1878, which in s....