JUDGMENT

VENKATACHALIAH, J. :— This appeal by the assessee, the Alembic Chemical Works Co. Ltd., arises out of and are directed against the judgment dated 23-1-1974, of the High Court of Gujarat in Income-tax Reference 78 of 1970, answering in favour of the Revenue a question of law referred to it under Section 256(l) of the Income-tax Act, 1961, (Act) by the Income-tax Appellate Tribunal.

2. On 8-6-1961, the assessee, a company engaged in the manufacture of antibiotics and pharmaceuticals was granted licence for the manufacture, on its plant, of the well-known antibiotic, penicillin. In the initial years of its venture the assessee was able to achieve only moderate yields from the penicillin producing strains used by it which yielded only about 5000 units of penicillin per millilitre of the culture-medium.

In the year 1963, with a view to increasing the yield of penicillin, the assessee negotiated with M/s. Meiji Seika Kaisha Limited ("Meiji" for short), a reputed enterprise engaged in the manufacture of antibiotics in Japan, which agreed to supply to the assessee the requisite technical know-how so as to achieve substantially higher levels of performance of production - of more than 10,000 units of penicillin per millilitre of cultured-broth with the aid of better technology and process of fermentation and with better yielding penicillin-strains developed by Meiji. The negotiations culminated in an agreement dated 9-10-1963, whereunder Meiji, in consideration of the once for all payment of 50,000 U.S. dollars (then equivalent to Rs. 2,39,625/-) agreed to supply to the assessee the "sub-cultures of the Meijis most suitable penicillin producing strains", the technical information, know-how and written description of Meijis process for fermentation of penicillin along with a flow-sheet of the process on a pilot plant; the design and specifications of the main equipments in such pilot-plant; arrange for the visits to and training at assessees expense, of technical representatives of the assessee to Meijis plant at Japan and to advise the assessee in the large scale manufacture of penicillin for a period limited to 2 years from the effective date of the agreement. It was also stipulated that the technical know-how supplied by Meiji was to be kept confidential and secret by the assessee which was prohibited from parting with the technical know-how in favour of others or to seek any patent for the process.

3. In the proceedings for assessment to income-tax for the assessment-year 1964-65 the assessee claimed that Rs. 2,39,625/- paid under the agreement to Meiji was one laid out wholly and exclusively for the purpose of the business and claimed its deduction as a revenue expenditure. The Income-tax Officer. on the view that the expenditure was for the acquisition of an asset or advantage of an enduring benefit, held it to be a capital outlay and declined the deduction. This view was affirmed by the Appellate Asst. Commissioner in the assessees first appeal.

The Income-tax Appellate Tribunal, Ahmedabad Bench, dismissed the further appeal of the assessee holding that the arrangements with Meiji envisaged the setting up of a large commercial plant for the production of the antibiotic modelled on the lines of the pilot-plant and that, therefore, the out-lay could not be treated as an expenditure laid out on and for purposes of the existing business, but must be regarded as one incurred for a new venture on a new process with a new technology on a new type of plant. The Tribunal held that the payment was once for all payment and was made for the acquisition of a capital asset. The Tribunal inter alia held :

"The sub-cultures and the information, design and flow sheet etc., were to be furnished once for all. Meiji also agreed to advise the assessee in respect of any difficulty the assessee may encounter in applying the sub-cultures and informations obtained by the assessee from Meiji to the large scale manufacture of penicillin. It is apparen