COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW versus BRITISH INDIA CORPN. LTD., KANPUR

Citation: [1987] 2 S.C.R. 133 · Decided: 03-02-1987 · Supreme Court of India · Bench: SABYASACHI MUKHERJI · Disposal: Dismissed

Judgment (excerpt)

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i 
COMMISSIONER OF INCOME-TAX, 
U.P., LUCKNOW. 
v. 
BRITISH INDIA CORPN. LTD., KANPUR. 
FEBRUARY 3, 1987 
[SABYASACHI MUKHARJI AND S. NATARAJAN, JJ.] 
Income Tax Act, 1922-s.10(2)(XV)-Assessee Company-
Entering into agreement with another company appointing its nominee 
A 
B 
as distributors of assessee's products-In lieu of benefit of technical 
knowledge assessee paid to the distributors for meeting initial expenses of C 
establishment of distributorship-Assessee claiming deduction-
Payment whether capital expenditure or revenue expenditure. 
The assessee-company entered into an agreement with M/s. 
Charles Walker and Company, London which, inter alia, stipnlated 
that the latter wonld permit the nse by the assessee of a number of D 
registered trade marks specified in the agreement and disclose to the 
approved officers of the assessee the technique, practices and applica- · 
tion of specialised tanning processes. Paragraph 7 of the agreement 
provided that the assessee wonld appoint Textile and General Supplies, 
nominee of the Charles Walker, as its distributors for the sale of indus-
trial leather manufactured by it in India and the assessee would pay 
E 
Rs.50,000 to the distributors for meeting the initial expenses of 
establishing the distributorship. This agreement was to be in force for a 
period of seven years. Simultaneously, another agreement was entered 
into between the assessee and Textile and General Supplies for a period 
of seven years, bnt no reference was made therein to the obligation of 
the assessee to pay Rs.50,000 to the distributors. 
F 
For the assessment year 1959-60 the assessee claimed the payment 
of Rs.50,000 to Textile and General Supplies as a deduction permissible 
nnder s.10(2)(XV) of the Income Tax Act, 1922, which was rejected by 
the Income Tax Officer, Appellate Assistant Commissioner and the 
Tribnnal on the ground that the said payment was in the nature of a G 
capital expenditure. 
In the Reference, the High Court allowed the claim of the assessee 
holding that the payment in question was a revenue exenditure. 
Dismissing the Appeal of the Revenue, 
133 
H 
A 
134 
SUPREME COURT REPORTS 
[1987] 2 S.C.R. 
HELD: 1. The real question is whether the payment that had 
been made by the assessee under the contract in question is a mere 
division of profits with another party or is it a payment to the other party, 
the amount of which is ascer1tained by reference to the profits. [138A-B] 
2; No test of Universal application can be laid down. The aim and 
B object of the expenditure was one of the guiding factors. The aim and 
object of incurring the expenditure in this case was the acquisition of 
the know-bow. Rs.50,000 was really part of the price paid by the asses-
see to obtain the know-how. Pursuant to Paragraph 7 of the said agree-
ment the assessee was bound to appoint Textile and General Supplies, 
nominee of Charles Walkeir, as its distributor for the sale of leather 
C manufactured by it in India. Paragraph 7 was an integral part of the 
agreement with Charles WaJker and was a part of the consideration for 
the receipt of the benefit. It was necessary condition of the agreement 
with Charles Walker to appoint Textile and General Supplies as dis-
tributors of the assessee. It was perhaps done to protect the technical 
know-how which Charles Walker was parting so that the distributors 
D would be a nominee of Charles Walker. [1380; H; l39C-D] 
3. Having regard to lthe nature of the agreement and having re-
gard to ahe facts that the organisational set up under the distributorship 
agreement was to endure for seven years and upon the expiry of the 
period, the assessee had no relationship with the orgaisation and that 
E the period of agreement between the assessee and the distributors was 
contemporaneous with the agreement between the assessee and Charles 
Walker under which the assessee became entitled to use the registered 
trade marks, it must be c9nsidered to be a revenue expenditure, be· 
. cause it. was part of the price for the acquisition of technical know-how 
and the condition of appointment , was a stipulation mentioned by 
F 
G 
Charles Walker. [1390-F] 
British Sugar Manufacturers, Ltd. v. Harris (Inspector of Taxes), 
7 I.T.R. 101; Countess Warwick Steampship Co. Ltd. v. Ogg, [1924] 2 
K.B. 292 at 298; Assam Bengal Cement Co. Ltd. v. Commissioner of 
Income-Tax, West Bengal, 27 I. T.R. 34; Commissioner of Income-Tax, 
Bombay City Iv. Ciba of India Ltd.,

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