The main legal point established in the judgment is that the nature of the expenditure, whether capital or revenue, depends on the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities.

Prathiba M. Singh, J.

The short question arising in the present appeal is – Whether the payment of Rs.1 Crore for exclusive use of the trade mark “HILTON” is to be treated as capital expenditure or revenue expenditure?

2. M/s. Hilton Roulands Ltd. (hereinafter ‘appellant’) entered into Trade Mark license agreement dated 27th January, 1993 (hereinafter ‘first license agreement’) which was later substituted with license agreement dated 9th November, 1995 (hereinafter ‘second license agreement’) with M/s. Hilton Rubbers Limited (hereinafter ‘HRL’). The questions that arise in this case are to be adjudicated in the context of these agreements.

Brief Background

3. M/s Roulands Fabriker Denmark (hereinafter ‘RF’) along with HRL and Industrialisation for Developing Countries, Copenhagen (hereinafter ‘IFU’) formed the appellant as a joint venture in India. HRL owned 50% of the equity shares of the appellant, and RF and IFU held 26% and 24% respectively of the said joint venture. At the time when the joint venture was formed, the first license agreement dated 27th January 1993, was entered into, under which the appellant was granted by HRL license to use the Trade Mark HILTON in respect of Raw-Edge and Wrapped V-Belts. The relevant clauses of the said agreement are as under:

“2(a). Subject to the terms of this Agreement the Proprietor hereby grants to the User for the term of this Agreement an exclusive right to use upon or in connection with Raw Edge, Wrapped V-Belts and other power transmissions belts excluding flat transmission belts (hereinafter referred to as “the Goods”) the Trade Mark in India and in such other countries to which the Goods are exported.

3(a). In consideration of the said right, the User shall pay to the Proprietor a running royalty on the domestic sale (i.e. sales within the Republic of India) of Raw-Edge and Wrapped V-Belts at the rate of 1.8% of the net selling price from the date of commercial production thereof.

The expression Net Selling Price shall mean ex-factory selling price of Raw-Edge and Wrapped V-Belts excluding sales tax, excise duty and other governmental taxes and levies, insurance, forwarding and packaging expenses and freight charges.

(b). Unless otherwise specified by the Proprietor, the royalty hereunder shall be paid to Hilton Rubbers Limited, S-21, Green Park Extension, i.e “” Delhi 110016, in India Rupees at half yearly intervals, within 60 days at the end of each calendar half year.

7(a). The User recognizes the Proprietor’s title to the Trade Mark and shall not at any time do or suffer to be done any act or thing which will in any way impair the rights of the Proprietor in and to the Trade Mark. In particular but without prejudice to the generality of the foregoing, the User undertakes not to use the Trade Mark in any manner which may jeopardize the istinctiveness or validity of the Trade Mark and shall apply and use the Trade Mark only on or in connection with such of the Goods and only in such form and manner as the Proprietor or his representative may from time to time direct or approve and the labels, containers, packaging, pamphlets, advertisements and the like used in connection with the Goods shall show the Trade Mark in such a manner and with such lettering and marking as may be so directed or approved.

11. This Agreement shall come into force on the date hereof and the User shall be entitled to use the Trade mark as an exclusive User thereof for the Goods. Subject to earlier termination in accordance with the provisions of Clauses 12 & 13, this Agreement shall run for an initial period of 10 years and shall continue thereafter_without limit of time until terminated by at least 12 calender months_previous written_notice given by either party to the other.”

(emphasis supplied)

Thus, as per the First license agreement:

(a) The appellant was granted an exclusive right to use the Trade Mark “HILTON” in India in respect of Raw-Edge and Wrapped V-Belts;

(b) Ownership of the mark vested in