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HIGH COURT OF CALCUTTA
SANKAR PRASAD MITRA, SABYASACHI MUKHERJI
COMMISSIONER OF INCOME-TAX (CENTRAL) - Appellant
Versus
HINDUSTHAN GENERAL ELECTRICAL CORPORATION LTD. - Respondent
Income-Tax Reference 94 Of 1965
Decided On : APRIL 16, 1969
INCOME TAX - Whether the sum of Rs. 13,938 was an expenditure of a revenue nature and was accordingly allowable as a deduction in computing the assessee's business profits.
Fact of the Case:
The assessee, a public limited company, entered into an agreement with Messrs. Simplex Electric Company Ltd. of England (hereinafter sometimes called the "foreign company") on 21st May, 1956. By this agreement, the assessee acquired certain rights to manufacture and sell in India products of "Simplex" design and to use the trade name "Simplex" on the terms and conditions therein mentioned. During the previous year, the assessee paid to the foreign company Rs. 5,360 for the cost of preparing and providing prints, designs, drawings, specifications, instructions and other information in terms of Clause 3 (a) of the agreement. The assessee also paid a sum of Rs. 13,938 under Clause 9 (a) of the agreement being royalty based on specified percentages. The Income-tax Officer allowed a deduction of Rs. 5,360 but disallowed the claim for deduction of Rs. 13,938 on the ground that it represented expenditure of a capital nature.
Finding of the Court:
The Tribunal held that what the assessee acquired was not the right of the trade name as such but the right to use the foreign company's trade mark on payment of royalty to be paid periodically depending on manufacture and sale of the products of 'Simplex' design. The Tribunal concurred with the Appellate Assistant Commissioner's View that the sum of Rs. 13,938 was an expenditure of revenue nature ana dismissed the appeal.
Issues: Whether, on the facts and in the circumstances of this case, and on a proper construction of the terms of the agreement dated May 21, 1956, entered into by the assessee with Messrs. Simplex Electric Go. Ltd. of England, the sum of Rs. 13,938 was an expenditure of a revenue nature and was accordingly allowable as a deduction in computing the business profits of the assessee?
Ratio Decidendi: The court held that the sum of Rs. 13,938 was an expenditure of a revenue nature and was accordingly allowable as a deduction in computing the assessee's business profits. The court observed that the assessee's foreign principals were merely supplying technical information to enable the assessee to carry on business in terms of the agreement. The court also held that the various types of payments that the assessee had to make seemed to be closely related to the assessee's manufacturing processes of "Simplex" products and were intimately linked up with the manufacturing activities of the assessee and not with the capital values of the assets that the assessee would acquire.
Final Decision: The court answered the question in the reference in the affirmative, holding that the sum of Rs. 13,938 was an expenditure of a revenue nature and was accordingly allowable as a deduction in computing the assessee's business profits.
( 1 ) THE assessment year is 1959-60 for which the previous year ended on the 31st July, 1958. The assessee is a public limited company. It carries on the business of manufacture and sale of certain electrical goods. On the 21st May, 1956, the assessee entered into an agreement with Messrs. Simplex Electric Company Ltd. of England (hereinafter sometimes called the " foreign company "}. By this agreement the assessee acquired certain rights to manufacture and sell in India products of " Simplex " design and to use the trade name " Simplex " on the terms and conditions therein mentioned. Some of the clauses of this agreement which the Tribunal has quoted in the statement of the case are as follows :"clause 3 (a ).--HGEC shall be liable to pay ' Simplex ' the cost (including freight, transport and insurance costs) of preparing and providing prints, designs, drawings, specifications, instructions and other information as aforesaid and of supplying patterns and tools upon invoices in respect thereof being submitted by ' simplex ' to HGEC. HGEC shall also pay to ' Simplex ' a fee at the rate of 500 per annum (payable annually in advance, the first payment to be made within one month from the date hereof and thereafter on the first day of each year of this agreement), towards the salary of the members of the staff of 'simplex' appointed for the purposes of paragraph (d) of Clause 2 and sums equivalent to the salaries or other remunerations of any persons sent as production engineers or technical advisers for the purpose of paragraph (e) of Clause 2 during their absence from England and all travelling and living expenses incurred by them during such absence, payments of such sums to be made promptly upon the same being invoiced by ' Simplex ' to HGEC. "" Clause 5 (a ).--Simplex will file and prosecute with due diligence an application for registration of HGEC as the registered user of the trade mark in respect of 'simplex' products and HGEC shall do all such acts and execute all documents necessary for enabling 'simplex' to obtain registration but in order that the validity of the registration by ' Simplex ' of the trade mark or any other trade mark bearing or using the word 'simplex' shall not be prejudiced by appearing in the market within India of ' Simplex ' products manufactured by HGEC no use shall be made of the said mark by HGEC until registration of HGEC as the registered user thereof shall have been completed. "" Clause 5 (g ).--Nothing herein contained shall affect, prejudice or derogate from the full right of ' Simplex ' either, (i) to use the trade mark in India upon or in relation to any goods for which it is the registered proprietor of such trade mark or upon or in relation to any goods on which it has heretofore used this trade mark in India, or (ii) to authorise another manufacturer thereof in so far as provided for in this agreement to make use of the trade mark as registered user thereof. "" Clause 5 (h ).--HGEC shall not manufacture or assemble ' Simplex ' products upon or in relation to which the trade mark is used save in accordance with such standards of quality and specifications as are acceptable to ' Simplex' in so far as those specifications are not at variance with specifications of the Indian Standard Institute and ' Simplex * is hereby empowered to withdraw the use of the trade mark from any products which it reasonably considers to be below standard and HGEC fails to manufacture in accordance with the standard of equality and specifications of ' Simplex ' in spite of being called upon to do so. "" Clause 5 (j ).--HGEC shall not at any time hereafter do any act or thing which may in any way prejudice or harm the registered proprietorship of ' Simplex ' in India of the trade mark and it will at the request and cost of 'simplex' do all such things and take all such steps as 'simplex' may reasonably require to protect or assist in the protection of the registration of ' Simplex ' as
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