Madras High Court
Commissioner Of Income-Tax vs Maschmeijer Aromatics (India) Pvt. ... on 30 August, 1994
Equivalent citations: [1995]214ITR22(MAD)
JUDGMENT Gulab C. Gupta, J.
1. This is a reference at the instance of the Department requiring this court to answer the following question of law :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 2 lakhs standing in the balance-sheet as goodwill should be excluded from the computation of capital for the purpose of levy of surtax ?"
2. This question arises for consideration for the assessment years 1973-74, 1974-75 and 1975-76.
3. It appears that the assessment for the aforesaid years was completed by the Income-tax Officer by adding the amount of Rs. 2,00,000 to the capital of the assessee. It is not in dispute that the assessee had entered into a collaboration arrangement with a Dutch company and is manufacturing synthetic musk and perfumery compounds. The foreign company, Messrs. Maschmeijer Aromatics, has permitted its technical know-how to be supplied to be used by the assessee. They have also permitted the use of their patent trademark, design, certification marks, etc., by the assessee-company. Clause 7(g) of the agreement provides that the assessee-company will have exclusive licence to use in India, the patents, trademarks, designs, licence, certification marks, processes and modes of production for the manufacture and sale of the said production in the country. It appears that the participation of the foreign company was to the extent of 49 per cent. of the subscribed capital and hence they were given 49 per cent. of the shareholding. The value of that holding was paid in cash at Rs. 2,90,000. The balance of Rs. 2,00,000 was paid as consideration for technical knowhow, etc., to be supplied by the said company. In accordance with the said arrangement, a sum of Rs. 2,00,000 is shown as having been paid in kind to the said company and appearing in the balance-sheet of the assessee-company and the assessee was assessed for the purpose of surtax to the amount which included this Rs. 2,00,000, as the capital of the assessee-company. It, however, appears that the Commissioner of Income-tax looked into the file of the assessee and felt that, taking into consideration the sum of Rs. 2,00,000 as capital was illegal and, therefore, issued a notice to show cause as to why the said order should not be set aside. Thereafter, after receiving the explanation of the assessee and considering the same, the order was passed holding that the amount of Rs. 2,00,000 could not be treated as capital under Explanation 1 to rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
4. The assessee felt aggrieved by the aforesaid order and took the matter to the Tribunal. The Tribunal, by its order dated July 21, 1978, held that Explanation 1 to rule 2 of the aforesaid rules is not attracted in the facts and circumstances of the case and, therefore, the Income tax Officer had rightly taken the said amount of Rs. 2,00,000 as capital by the assessee.
5. The present reference was thereafter sought for and made at the request of the Department and is before this court for consideration.
6. The facts and circumstances of the case are no longer in doubt. The assessee has, in fact, allotted 200 shares worth Rs. 2,00,000 to its foreign collaborator in consideration not only of the know-how, but also for the use of patents, trademarks, licence, certification, designs, marks, etc., in India. It is also not in dispute that having done so, the assessee has shown the said amount of Rs. 2,00,000 in the balance-sheet as paid-up capital. The question requiring consideration is whether this amount should be treated as otherwise than the capital of the assessee-company ? The submission of learned counsel for the Department appears to be that Explanation 1 of rule 2 of the Rules in the Second Schedule to the Act deals with paid-up share capital brought in a particular manner and would be attracted in the instant case. The aforesaid argument ignores the fact that the amount of Rs. 2,00,000 is shown as paid-up share capital under clause (i) of rule 1 of the Rules in the said Schedule. Rule 2 applies to a case where the income from the assets is to be excluded in accordance with clause (iii) or (vi) or (viii) of rule 1 of the First Schedule. It does not apply to a case covered by clause (i) of rule 1. Learned counsel for the Department, how-ever, insisted that the said Explanation would be attracted in relation to clause (i) of rule 1, only because it deals with the paid-up share capital. The point really is unarguable and ignores the basic rule of interpretation. It is well settled that the Explanation attached to rule explains the matter contained in the said rule and does not stand either by itself or go beyond the particular rule. On the basis of this rule, the Explanation will have to be understood in the context of the main rule 2 itself. The main rule 2, as stated earlier, relates to situations mentioned in clause (iii) or (vi) or (viii) of rule 1. Under the circumstances, this Explanation will not be applied or attracted to other clauses of rule 1. Since the case in hand is covered by clause (i) of rule 1, there is no scope for applying the Explanation to the facts and circumstances of the case. We have, therefore, no hesitation in rejecting the submission.
7. It was also submitted that what the assessee has obtained from its foreign collaborator is the licence to use the design, etc., and not the owner-ship thereof and, therefore, the amount paid was only to be treated as revenue expenditure and not capital. There is again no substance in the submission. The argument assumes that capital can only be utilised for purchasing a permanently transferable asset which is not the correct position in law. The licence to use the technical know-how and trademark is also a purchasable commodity and since it was purchased at a price, paid in terms of shares of the company, it could not be treated as anything other than capital. The fact that it is described as goodwill in the balance-sheet is also important and indicates that the benefit thereof was made available to the assessee from the beginning of its business. It is not correct to say that mere goodwill has been purchased by the assessee in the instant case. The agreement details the use of not only the technical know-how, but also patent, design, etc., which would be a commodity like any other capital asset. For this reason, the argument that the amount paid will have to be treated as a revenue expenditure cannot be accepted. The Bombay High Court in a similar situation in CIT v. Indabrator Ltd. [1992] 196 ITR 842 has also taken this very same view.
8. In view of the discussion aforesaid, the view taken by the Tribunal must be accepted as the correct view of the matter. The question is, therefore, answered in the negative and against the Department. No costs. Counsel's fee Rs. 1,000.