Commissioner of Income Tax, Gujarat-II vs Vac Met Corporation Pvt. Ltd.

J.B. Mehta, J.—In this reference the Tribunal had posed the following two questions - one at the instance of the assessee and the other at

the instance of the Commissioner.

At the instance of the assessee :

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not allowing the amount of Rs. 15,000 paid to Dinaben

Khorsedji as revenue expenditure and/or appropriate under s. 35A of the I.T. Act, 1961 ?

At the instance of the Commissioner :

If the answer to question No. 1 is in the affirmative, 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 virtue of the agreement into by the assessee

with Dinaben Khorsedji ?

The assessment year in question was 1969-70, previous year being from January 1, 1968, to December 31, 1968. The assessee claimed Rs.

15,000 as expenditure for technical know-how but for reasons recorded in the earlier assessment orders, the ITO had disallowed the same. The

AAC also found that assessee had agreed under the agreement in question at annexure B dated October 12, 1967, to pay Rs. 51,000. Out of this

amount Rs. 21,000 were paid in the earlier assessment year and it was treated as capital expenditure and a further sum of Rs. 15,000 was paid in

this year. Therefore, the terms of the agreement were held to indicate that it was payment for the purchase by the assessee from the owner and for

utilising this technical know-how of the process for manufacture of High Vacuum Transfer Foils. As such payment was found not to be dependent

upon or relating to the return on the use of the capital know-how it was held to be a capital expenditure. The AAC, however, held that, as no

capital asset had been brought into existence, no claim of depreciation could be allowed and the claim was disallowed for depreciation as well and

he confirmed the disallowance of Rs. 15,000. The assessee having gone in appeal, the Tribunal has dealt with this question in paras 43 to 45 in its

order as under :

The second item is regarding confirmation of disallowance of Rs. 15,000 in respect of payment made for acquisition of patent rights of High

Vacuum Transfer Foils. The AAC noted that the assessee entered into an agreement on 12-10-67 with Dinaben Khorsedji of Bombay who was

the owner of technical formula for the manufacture of high vacuum transfer foils. The assessee agreed to pay her Rs. 51,000 as consideration in

instalments. Rs. 21,000 paid earlier were treated as capital expenditure but this year Rs. 15,000 were paid and the assessee claimed it as revenue

expenditure but the ITO disallowed it again this year as capital expenditure. The AAC noted that the terms of agreement clearly indicated that this

was the payment for the purchase and utilisation of the technical know-how and was not dependent upon or related to the return on the use of

capital know-how. According to the AAC, this was in the nature of capital expenditure, and s. 35A did not apply and he confirmed the

disallowance.

Vepari urged that even if it was capital expenditure, the assessee was entitled to depreciation. He referred to the decision of the Gujarat High

Court in the case of Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., .

In our view, the decision of their Lordships gives adequate guidance. This clearly capital expenditure and the assessee is entitled to

depreciation on the same. Hence the disallowance as a capital expenditure and not giving benefit u/s. 35A are justified but the assessee should be

given benefit of depreciation.

Following the decision in Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., , the Tribunal has held that this being

clearly capital expenditure the assessee was entitled to depreciation on the same. Disallowance as revenue expenditure was held to be justified but

the assessee was given the benefit of depreciation and the appeal of the assessee was accordingly allowed. Therefore, the Commissioner has got

the second question referred to this court while the assessee has got reference on the first question.

So far as the first question is concerned, Shah does not press for that reference and, therefore, no answer is necessary on that question as the

reference is not pressed by the assessee.

As regards the second question, the TRibunal has not stated in the statement of the case the requisite basic facts which are absolutely necessary

for answering such reference. In a series of references because of this faulty practice where the Tribunal does not set out proper findings of fact,

we are required to wade through all the orders. We do no find proper findings of fact which should have first been arrived at before applying the

ratio in Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., . The Tribunal has proceeded on the assumption that according

to the guidance given by this court in the decision in Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., , whenever there is

clearly capital expenditure, the assessee is entitled to depreciation on the same. Except nothing what the AAC had stated in his order that the terms

of the agreement clearly indicated that this was the payment for the purchase and utilisation of the technical know-how, and that, accordingly, it

was in the nature of capital expenditure, nothing further is stated by the Tribunal. Straight-away on the assumption that the capital expenditure is

entitled to such depreciation, the Tribunal has proceeded to allow this claim.

It is, therefore, necessary to draw the attention of the Tribunal to the necessity of proper findings of fact being recorded in its order stating

clearly as to what finding of the AAC it had agreed to or was confirming or modifying and the same must be stated in the statement of case so that

this court could on the basis of those findings of fact, which would be binding on this court, answer the legal question raised in the reference. The

importance of this could not be overemphasised as otherwise the time of this court is wasted in wading through the orders and going through the

entire record for finding out what are the real findings of fact of the Tribunal. In Dalhousie Investment Trust Company Ltd. Vs. Commissioner of

Income Tax (Central), Calcutta, , their Lordships had categorically made the following observations :

We have mention that a statement of the case should contain all the facts, whether mentioned by the ITO or the AAC, which the Appellate

Tribunal accepts and it should not be left to the High Court or the Supreme Court to discover whether all the findings of the ITO and the AAC had

been accepted by the Appellate Tribunal or not. As we have already mentioned, it is not quite clear from the appellate order of the Appellate

Tribunal or the statement of the case what facts the Appellate Tribunal really found or accepted as correct.

It should be noted that their Lordships had in that case been required to direct the Appellate Tribunal to make additions to the statements of the

case in the light of that order and send the amended statement of the case to the Supreme Court within the period laid down by their Lordships.

The other alternative would be as in the case of COMMISSIONER OF Income Tax, WEST BENGAL I Vs. INDIAN MOLASSES CO. P.

LTD., , to refuse to answer the reference and to leave to the Tribunal the whole matter to adjust its order in the light of our observations because

this court would not be able to answer the reference without the necessary findings of fact being first arrived at by the Tribunal. Both the process

are absolutely time consuming and would delay the whole assessment. That is why we emphsise the importance of this aspect being duly borne in

mind by the Tribunal so that such time consuming process would not be necessary in other references, which would defeat the whole legislative

process, only because of laxity in the process adopted by these Tribunals, who are expected to do substantial justice by expenditious disposal of

these tax matters.

We shall first in this case point out what is the real ratio of the Elecon Engineering Co.''s case [1974] 96 ITR , and what are the basic facts

which should be first found so that ratio could be applied. In the decision in CIT v. Elecon Engineering Co. Ltd. [1974] 96 ITR 673 , it had been

laid down by this court that under s. 32 of the I.T. Act, 1961, depreciation can be claimed, (i) in respect 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 s. 34. While

considering these three conditions, so far as the plant was concerned it was pointed out that the relevant test to be applied was : ""Does it fulfill the

function of plant in the assessee''s trading activity ? Is it the tool of the tax-payer''s trade ?"" If it is, then the finding would be that it was plant, no

matter that it was not very long lasting or did not contain working parts such as a machine did and played a merely passive role in the

accomplishment of the trading purpose. Know-how is a peculiar kind of asset, it being the accumulated fund of knowledge acquired by years of

observation, research, experimentation and experince. The whole of it was not in an intangible form even while it was in the process of being

acquired and very often it took a physical form as it grew in the shape of formulae, drawings, patterns, blue prints, specifications and so on. The

material form it took not only facilitated preservation, collation and ready reference but also made it perceptible and visible and easily capable of

being transmitted to others. Books which one consulted to inform one''s mind and thereby used them in the course of one''s business or profession

were expressly included within the meaning of the word ""plant"". Hence, there was no reason to exclude from the wide meaning of the term objects

of similar nature such as drawings, patterns, designs, etc., which, like books, were the embodiment of know-how (even assuming that know-how

itself was intangible) and were clearly included within the meaning of the word ""plant"" in s. 32. Therefore, it was held that the depreciation

allowance could be claimed even for this type of plant, as this type of asset was also shown to be capable of diminishing in value on account of the

known factors, as per the prevailing accounting or commercial practice, like ordinary wear and tear, unusual damage, inadequacy and

obsolescence. It was also held that apart from the accounting practice even s. 32(1)(iii) itself spoke of allowance in the case of any plant which

was ""discarded"" in the previous year and the word ""discarded"" was always understood in the sense of obsolescence. Therefore, know-how in

whatever form it was, it was capable of diminishing in value over the years by obsolescence and, therefore, this type of assets was a plant which

was entitled to earn depreciation under s. 32.

Therefore, the aforesaid ratio makes it in terms clear that the basic facts which the Tribunal must find are not that this is capable expenditure

which as such is entitled to earn depreciation but because this asset falls within the meaning of the word ""plant"" as explained in that decision, by

fulfilling the relevant test laid down, namely, that it fulfills the function of a plant in the assessee''s trading activity by being a tool of the taxpayer''s

trade and the relevant other conditions must be clearly found, viz., that this plant was owned by the assessee and was used for the purpose of his

business or profession and that the depreciation allowance claim would fulfill the third contention that it was claimed subject to the provisions of s.

Therefore, the relevant finding of fact must make it clear that this relevant test was fulfilled; that this know-how asset in the present fulfilled its

trade and, secondly, that it was owned by the assessee and was used for the purposes of the business or profession. In the other decision in

Commissioner of Income Tax, Gujarat-I Vs. S.L.M. Maneklal Industries Ltd., , the importance of this question was further examined. First, the

Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., ratio was explained at page 152 that it is only when the know-how and

the physical embodiments of that know-how were included in the term ""plant"" as explained in the ratio, and the plant was owned by the assessee

and utilised for the purpose of his business that depreciation could be allowed. The question was in terms considered whether every expenditure

incurred in connection with the capital asset was the expenditure of a capital nature. At page 154, the whole ratio was laid down that where the

payment was made for the ownership of a capital asset which was the tool of an assessee''s trade, it would not be difficult to come to the

conclusion that the expenditure was in the nature of capital expenditure. Where, however, the benefit of a capital asset was secured as one element

of a comprehensive arrangement, by virtue of which a trader sought to obtain advantage with the end in view to expand his business and earn

greater profits, the whole transaction would have to be critically analysed in order to find out whether the expenditure incurred was a part of that

transaction for acquiring the benefit of the use of the capital assets and was in the nature of capital expenditure. The Commissioner of Income Tax,

Gujarat-II Vs. Elecon Engineering Co. Ltd., ratio was referred to and it was pointed out that in that case there was no controversy before the

Tribunal as to whether the expenditure in question was a revenue expenditure. The assessee did not seriously press the contention that the

expenditure in question was revenue expenditure. The assessee, however, contended that if the expenditure was of a capital nature as held by the

Income Tax authorities, what was acquired as a result of such expenditure would be capital asset in respect of which the assessee was entitled to

depreciation allowance under s. 32 of the Act. Therefore, in the Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., , it

was held that the depreciation allowance could be claimed by an assessee in respect of a property which he owned, as the question about

ownership of designs, etc., was never in dispute, because both the sides had proceeded upon the footing that by incurring that particular

expenditure, the assessee had acquired certain know-how, and the only question was whether depreciation allowance could be allowed in respect

of that particular know-how which was taken to be a capital asset by both the sides. However, in Commissioner of Income Tax, Gujarat-I Vs.

S.L.M. Maneklal Industries Ltd., , though the court proceeded on the basis that the physical embodiment of the know-how were plant, it still

considered the further question whether the assessee had owned the same or merely acquired a licence to use the same.

Therefore, if both these decisions are clearly borne in mind in the context of such cases when the serious dispute is raised between the parties

as to whether it was capital expenditure or revenue expenditure and whether depreciation allowance was admissible, as it is clear in the present

case because both the questions are referred, it is obvious that the Tribunal could not proceed except after recording proper findings. In order to

apply the ratio of Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., , the Tribunal had first to record to the necessary

findings as earlier indicated, and thereafter, if it is found after applying this test that this technical know-how in question satisfied the requirement of

a plant by being a tool of the trade of the assessee and that it was owned and utilised by the assessee for the purpose of his business that Elecon

Engineering ratio could be applied.

In the present case, however, both the sides have made it clear that there is no dispute as regards the relevant facts at this stage because Shah

does not even press the first question. The learned standing counsel also admitted that in so far as the facts of the present case are concerned, this

technical know-how, which was embodied in the patterns and designs in question shown to the Tribunal, formed the tool of the trade and so, the

assessee satisfied the test of the plant. There was also no dispute that this plant was owned and utilised for the business purpose by the assessee.

Therefore, even though the findings were not clear, it is not necessary for us to pursue the aforesaid time-consuming course by either calling for the

fresh statement of the case or by refusing to answer the question because the matter is clearly concluded as per the Commissioner of Income Tax,

Gujarat-II Vs. Elecon Engineering Co. Ltd., , in view of the aforesaid facts which are no longer in dispute between the parties.

Therefore, in view of the aforesaid settled legal position of Commissioner of Income Tax, Gujarat-II Vs. Elecon Engineering Co. Ltd., , our

answer for the second question must be in the affirmative, that is to say, in favour of the assessee and against the revenue. Accordingly, the present

reference is disposal of with no order as to costs.