ALEMBIC CHEMICAL WORKS CO. LTD. versus COMMISSIONER OF INCOME TAX, GUJARAT

Citation: [1989] 2 S.C.R. 302 · Decided: 31-03-1989 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Appeal(s) allowed

Cited by 1 judgment(s) · cites 1 · see the full citation network in Lexace

Judgment (excerpt)

A 
ALEMBIC CHEMICAL WORKS CO. LID. 
v. 
COMMISSIONER OF INCOME TAX, GUJARAT 
MARCH 31, 1989 
B 
[R.S. PATHAK, 0 
AND M.N. VENKATACHALIAH, JJ.j 
Income Tax Act, 1961: Section 37-Tests to determine whether -~ 
Capital or Revenue Expenditure--' Once for all' and 'enduring benefit' 
tests-Not conclusive--Object and effect of the expenditure to be looked 
into--'Once for all payment' made by manufacturer to a foreign com-
e pany for supply of technical know-how etc. for increasing production 
improvisation in the process and technology supplemental to existing . I 
business-No new venture--Whether the payment made is a revenue 
~ 
expenditure qualifying for deduction. 
The appellant-assessee, a company engaged in the manufacture 
D of penicillin, in order to increase its production, entered into'!" agree· 
ment with a Japanese firm (Meiji) for supply of sub-cultures of penicil· 
Jin producing strains, technical know-bow, training, written descrip· 
tion of the process on a pilot plant, design and specifications of the main 
equipment in such pilot plant, and to advise the assessee In the large· 
~
scale manufacture of penicillin for a limited.period of two years. 
E 
As per the agreement, the assessee paid Rs.2,39,625 to Meiji and 
claimed the same as revenue expenditure In its Income tax assessment 
for the assessment year 1964-65. Disallowing the claim the Income Tax 
Officer held that the expenditure was for the acquisition of an asset or 
advantage of an enduring benefit and thus a capital outlay. The Appel· 
F late Assistant Commissioner confirmed the order of the Income Tax 
Officer. 
G 
The further appeal of the assessee was dismissed by the Income 
Tax Appellate Tribunal holding that the payment made to Meiji was 
'once for all payment' made for the acquisition of a capital asset. 
At the instance of the assessee, the Tribunal referred to the High 
Court, the question as to whether the sum paid to Meiji was a revenue 
expenditure. The High Court answered the question in the negative. 
The present appeal is against that order of the High Court. 
H 
The assessee also moved an application before the High Court 
302 
t
ALEMBIC CHEMICAL v. C.l.T. 
303 
~ seeking a direction to the Tribunal to refer another question of law as to 
whether a new plant was obtained or installed by the assesKe conse-
A 
quent upon the agreement. Declining to interfere, the High Court ob· 
served that the Tribunal has not recorded a finding lo the effect that a 
completely new plant was obtained by the assessee and the Tribunal's 
decision that the assessee, had obtained a new process and a new techni· 
~ 
cal know-how from Meiji was not without evidence. 
B 
~ 
Against the above order of the High Court, the assesKe preferred 
. 
an appeal lo this Court, which was formally disposed of with a direction 
to the Tribunal lo draw up a supplementary statement of the case and 
refer for the opinion of this Court, the further question of law as sought 
for by the assessee; and such a question lo be considered in the present c 
~~ 
appeal. 
, 
On behalf of the assessee, it was submitted that the Tribunal was 
influenced by an erroneons assumption that the agreement envisaged 
the setting up of a new plant, whereas the objective of the agreement 
was only to increase the yield of penicillin in the existing plant itself. 
D 
The Revenue contended that there was a new venture based on a 
new technology and kriow-how of unlimited duration which required a 
,~ 
new plant for its commercial exploration. 
Allowing the appeal, 
E 
• 
HELD: 1. The financial outlay under the agreement was for the 
better conduct and improvement of the existing business ·and should, 
therefore, be held to be a revenue expenditure. There is also no single 
~J.. 
definitive criterion which, by itself, is determinative whether a partlcu· 
lar outlay is capital or revenue. The 'once for all' paymenl test is also 
F 
inconclusive. Whal is relevant is the purpose of the outlay and its in-
)-
tended object and effect, considered in a common-sense way having 
regard to the business realities. The rapid strides in science and technol· 
• 
ogy in the field should make this Court a little slow and circumspect in 
· too readily pigeon-holing an outlay, such as this, as capital. The 
-~ 
circumstance that the agreement in so far as it placed limitations on the 
G 
right of the assessee in dealing with the know-how and the conditions as 
to non-partibility, confidentiality and secrecy of th

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