Income-tax---

----Revision---Powers of Commissioner---Order prejudicial to interests of revenue---Capital or revenue expenditure ---Assessee engaged in business of manufacturing and selling electric motors ---Assessee entering into agreement with licensor for supply of technical know-how in the form of drawings, designs, technical documents, etc.---One set of initial drawings and technical documentation to be supplied to assessee free of charge---Duration of agreement was for a period of 10 years---After expiry of agreement it was to continue in force until terminated by one year's notice ---Assessee acquired during benefit under agreement---Royalty paid to licensor was capital expenditure ---ITO holding royalty paid was revenue expenditure-- Commissioner holding assessment order erroneous and prejudicial to interest of Revenue and remanding matter to ITO for decision afresh ---Justified-- Indian Income Tax Act, 1961 , S.263.

The assessee, which was engaged in the business of manufacturing and selling electric motors, entered into an agreement with the licensor for supply of technical know-how in the form of drawings, designs, technical document., etc., on payment of royalty amounting to Rs.3,25,927 to the licensor. 7the assessee claimed deduction of the amount of royalty paid to the licensor a-Is revenue expenditure. The Income-tax Officer allowed the claim for deduction. The Commissioner of Income-tax found that the duration of the agreement was for a period of ten years which stood extended until terminate by either party, that the advantage derived by the assessee under the agreement was of an enduring nature, which would endure even after the licence agreement was over and hence the payment of royalty was capital expenditure. The Commissioner of Income-tax, therefore, held that the order of the Income-tax officer was erroneous and prejudicial to the interests of the Revenue end he issued notice to the assessee under section 263 of the Income Tax Act, 1961. After hearing the assessee, the Commissioner of Income-tax set aside the assessment order and remanded the matter to the Income-tax Officer for decision afresh. The Tribunal affirmed the order of the Commissioner of Income-tax. On a reference:

Held, that under Article 4 of the licensing agreement for the supply of additional design and manufacturing drawings and other information, necessary to disclose any modification and improvements made in the products, the licensor was to be paid by the assessee licensee one half per cent., royalty in addition to the royalty mentioned in Article 8 of the agreement. As provided by Article 4-A, one set of initial drawings and technical documentation was to be supplied to the licensee free of charge. The duration of the agreement as provided under Article 2 was from September 1, 1972, up to March 10, 1982, and even after the expiry of the agreement, it was to continue in force until terminated by giving one year's notice in writing. The assessee had, therefore, acquired a benefit of enduring nature under the agreement. The Commissioner of Income-tax had lawfully exercised his powers under section 263 of the Act and had taken a decision after giving the assessee an opportunity of being heard in the matter, as envisaged) by that provision. The Tribunal was, therefore, right in holding that the Commissioner was justified in passing the order under section 263 of the Act setting aside the assessment order and directing the Income-tax Officer to take a fresh decision

Jonas Woodhed & Sons (Ind.) Ltd. v. CIT (1997) 224 ITR 342 (SC) fol.

CIT v. Jyoti Ltd. (1979) 118 ITR 499 (Guj.) ref.

14: M. Talati for the Assessee.

B. B. Nayak with Mainsh R. Bhatt for the Commissioner.

JUDGMENT

A. K. ABICHANDANI, J.---The Income-tax Appellate Tribunal, Ahmedabad, has referred the following question for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Commissioner was justified in passing the order under section 263 of the Act in setting aside the assessment order?"

The matter relates to the assessment year 1976-77, in which the question cropped up as to whether the assessee-company which was doing the business of manufacturing and selling electric motors; was entitled to deduct a sum of Rs.3,25,927 as payment of the royalty made to the licensor Jyoti Limited for providing it with technical know-how in the form of drawings, designs, technical documents, etc., as revenue expenditure. The Income-tax Officer allowed the claim. However, the Commissioner of Income-tax, noted that the advantage derived by the assessee-company in consideration of the payment of the said amount was of an enduring nature, which would endure even after the licence agreement was over. It, therefore, appeared to him that the payment of the said amount was of capital nature, and therefore, not admissible as a deduction in computing the income from business. The Commissioner, therefore, issued a show-cause notice under section 263 of the Act on the ground that. the order passed by the Income-tax Officer on this point was erroneous and prejudicial to the interests of. the Revenue. The assessee was heard in response to the notice and it contended that the royalty paid was only a licence fee. The assessee relied upon a decision of this Court in CIT v. Jyoti Limited (1979) 118 ITR 499, in support of its contention that the expenditure should be treated as revenue expenditure. The Commissioner held that the duration of agreement was from September 1, 1972 up to March 10, 1982, which stood extended until terminated by either party. It was, therefore, held that the advantage derived by the assessee was of an enduring nature. The Commissioner held that the assessment order was erroneous and prejudicial to the interests of the Revenue and set aside the same with a direction to the Income-tax Officer to examine the terms of the agreement and decide the matter afresh. The Tribunal, in appeal filed by the assessee, held that the expenditure in question was prima facie expenditure of capital nature as held by the Commissioner and, therefore, the Commissioner was justified in exercising his jurisdiction under section 263 of the Act. The Tribunal made it clear that the Income-tax Officer after examining the agreement and other material would be justified in passing any order which he thinks proper on the merits.

The assessee's case is that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue and that order of the Income-tax Officer was in conformity with the provisions of law and in accordance with the decision of this Court in CIT v. Jyoti Limited (1979) 118 ITR 499, and, therefore, there was no valid ground for the Commissioner to exercise his powers under section 263 of the Act.

It will be noted from Article 4 of the licensing agreement that for the supply of additional design and manufacturing drawings and other information, necessary to disclose any modification and improvements made in the products, the licensor was to be paid by the assessee licensee one-half per cent. royalty in addition to the royalty mentioned in Article 8 of the agreement. As provided by Article 4-A, one set of initial drawings and technical documentation was to be supplied to the licensee free of charge. The duration of agreement as provided under Article 2 was from September 1, 1972, up to March 10, 1982, and even after the expiry of agreement, it was to continue in force until terminated by giving one year's notice in writing. It would, therefore, prima facie appear that the assessee had acquired a .benefit of enduring nature. As held by the Supreme Court in Janas Woodhead & Sons (India) Ltd. v. CIT (1997) 224 ITR 342, the sum paid for a benefit of enduring nature such as for obtaining technical know how, the drawings, specifications, blueprints of production and testing equipments, etc., would constitute capital expenditure. The Tribunal rightly distinguished the decision of this Court in CIT v. Jyoti Limited (1979) 118 ITR 499, because in that case, on the basis of the terms of the collaboration agreement, it was found that the property in the specifications, drawings, etc., did not pass to the Indian manufacturer and there was no question of acquisition of assets of a capital nature by the assessee so far as these drawings, designs, patterns, etc. were concerned.

The Commissioner, under section 263 of the Act, is empowered to make an order enhancing or modifying the assessment; or cancelling the assessment and directing a fresh assessment, if he considers that any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner had lawfully exercised his powers under section 263 of the Act and taken a decision after giving the assessee an opportunity of being heard in the matter, as envisaged by that provision. The Tribunal was, therefore, right in holding that the Commissioner was justified in passing the order under section 263 of the Act setting aside the assessment order and directing the Income-tax Officer to take a fresh decision.

The question referred to us is, therefore, answered in the affirmative against the assessee and in favour of the Revenue. The reference stands disposed of accordingly with no order as to costs.

M.B.A./14/FCReference answered.