M/S. JONAS WOODHEAD AND SONS LTD., MADRAS versus THE COMMISSIONER OF INCOME TAX, MADRAS

Citation: [1997] 1 S.C.R. 1145 · Decided: 11-02-1997 · Supreme Court of India · Bench: S.C. AGRAWAL · Disposal: Dismissed

Judgment (excerpt)

. ,... 
M/S. JONAS WOODHEAD AND SONS LTD., MADRAS 
A 
v. 
THE COMMISSIONER OF INCOME TAX, MADRAS 
~ 
FEBRUARY 11, 1997 
"' 
B 
i 
(S.C. AGRAWAL AND G.B. PATTANAIK, JJ.) 
~ 
Income Tax Act, 1961 : Section 37. 
income Tax-AYs. 1967-68 and 1968-69-Business expendi-
ture--Royalty-Assessee, an Indian company, collaborated with a foreign c 
company for giving technical inf onnation and know- how for setting up plant 
for manufacture of products-For technical know-how and services srendered, 
asses see was liable to pay to the foreign company royalty at a certain 
percentage of gross turnover of such products-Assessee could continue 
# 
-~ 
manufacture even after expiry of agreement-Held : The entire amount of D 
--'-" 
royalty paid by the assessee not a revenue expenditure even though it related 
to gross turnover-High Court rightly upheld Appellate Tribunal's view that 
25% of the royalty was capital expenditure and, there[ ore,· not allowable as 
revenue expenditure. 
Incom~Tax Business expenditur~apital or revenu1:-Test to deter-
E 
min~Stated. 
The appellant-assessee, a limited company which has been carrying 
-· 
on the business of manufacture of automobiles springs, entered into an 
agreement with a foreign company for manufacture of all types of spriugs 
F 
and suspension for road and rail vehicles. Under the terms and conditions 
of the agreement between the parties it was stipulated that the foreign firm 
would give the assessee the technical information and know-how relating 
to the setting up of a plant suitable for manufacture of the products as 
well as the technical know-how relating to the setting up of the plant itself, G 
the drawings, estimates, specifications, manufacturing methods, blue 
prints of production and testing equipment and other data and informa-
~ 
tion necessary to manufacture the product. The agreement also provided 
that in consideration of the information to be furnished and services to be 
rendered to the assessee by the foreign firm the assessee shall pay a royalty 
at a certain percentage of the gross turnover of the products. 
H 
1145 
A 
1146 
SUPREME COURT REPORTS 
[1997) 1 S.C.R. 
The Income Tax Appellate Tribunal held that 25% of the amount 
paid by the assessee to the foreign company was capital expe!lditure under 
Section 37 of the Income Tax Act, 1961 for the AssessmentYears 1967-68 
and 1968-69. The said decision, in a reference, was uphel~ by the High 
Court. The High Court considered the different clauses of the agreement 
B and held that the assessee had acquired a benefit of enduring nature, 
which would constitute "acquisition of an asset and amount paid for the 
same would constitute capital expenditure". Being aggrieved by the High 
Court's judgment the appellant-assessee preferred the present appeal. 
c 
Dismissing the appeal, this Court 
HELD : 1. The question whether a particular payment made by an 
assessee under the terms of the agreement forms a part of capital expen-
diture or revenue expenditure would depend upon several factors, namely, 
whether the assessee obtained a completely new plat with a completely new 
process and new technology for manufacture of the produd or the payment 
. D was made for the technical know-how which was for the betterment of the 
product in question which was. already being produced; whether the im-
provisation made, is the part and parcel of the existing business or a new 
business was set up with the so-called technical know-how for which 
payments were made; whether on expiry of the period of agreement the 
E assessee is required to give back the plans and designs which were ob-
tained, but the assessee could manufacture the product in the factory that 
has been set up with the collaboration of the foreign firm; the cumulative 
effect on a construction of the various terms and conditions of the agree-
ment; whether the assessee derived benefits coming to its capital for which 
the payment was made. [1150-C-E] 
F .. 
Alembic Chemical Works Co. Ltd. v. CIT, 177 (1989) ITR 377, 
referred to. 
2. In the instant case, the Income Tax Appellate Tribunal having 
considered the different clauses of the agreement and having come to the 
G conclusion that under the agreement with the foreign firm what was set up 
by the assessee ·was a new business and. the foreign firm had not only 
furnished information and the technical know-how ·but also rendered 
valuable services in setting up of the factory itself and even after the expiry 
of the a

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