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(i) 186.5 million lire for the grant of the process and know-how licence.
(ii) 250 million lire for the supply of the know-how and basic design engineering of the plant.
(iii) 186.6 million lire for the supply of technical assistance and continuous know-how in Italy, including training of the company's personnel in Italy.

Out of this 250 million lire payable for supply of basic engineering of the plant was treated by the assessee-company as capital expenditure and the remaining two items of 186.5 million lire the equivalent of which in Indian currency is Rs. 30,57,499 were treated as revenue expenditure on the ground that they represented expenditure for efficient running of the business, after commencement of production. This plea was based on the view that any expenditure incurred on running of a business in a more efficient manner is always an expenditure incurred on revenue account. The ITO found on enquiry that the erection of the factory was not complete and, therefore, there was no question of running business more efficiently. The business not having been started, the expenditure incurred could not be said to have been of revenue nature. By referring to certain decisions more particularly the decision of the Supreme Court in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 the ITO disallowed the claim of the assessee by treating it as capital expenditure. He disqualified this expenditure even from the allowance of depreciation and development rebate. This is in main the reason that prevailed with the ITO to disallow the claim. But the Commissioner (Appeals) on appeal took a different view. The Commissioner (Appeals) analysed the agreement and found certain salient factors having bearing on the subject of allowability. He found :

4. Technimont agreed to grant the know-how and patent rights and to offer these services to J.K. Synthetics.
5. The consideration for the use of know-how, basic design engineering and technical assistance was fixed at 623 million Italian lire, consisting of:
(a) 186.5 million lire for grant of processs and know-how licence for manufacturing acrylic fibre.
(b) 250 million lire for supply of know-how and basic design engineering for setting up the plant.
(c) 186.5 million lire for supply of technical assistance and continuous know-how, including training of J.K.'s personnel for running the plant.

6. On 29-4-1974 the assessee-company entered into an agreement with Tecnimont, SPA a company situated in Italy. This agreement was called Licence and Technical Assistance Contract, which nomenclature throws certain light on the intention of the parties. This agreement provided that there was another company called Montefibre, which has a successor to Chatillon, another company, became the owner of know-how and patent rights for the design, erection, operation and production of acrylic fibre. The Tecnimont had only the experience and capability for providing basic design and technical services in the matter of design, erection and production of acrylic fibre. The assessee-company was desirous of setting up a plant at Kota, Rajasthan for the production of acrylic fibre. Tecnimont expressed its willingness to offer its services to the assessee-company for providing technical know-how, basic design and technical services for the setting up of the plant and operation and was willing to grant those rights and perform the said services for the assessee-company. It was also prepared to carry out the detailed engineering survey needed for this purpose. With this preamble, the agreement went on to provide that Tecnimont would grant to the assessee-company a non-exclusive, non-transferable permanent and irrevocable licence to use the process and the know-how owned by Montefibre and the relevant patent rights. It also granted the assessee-company the right to sell the products in Asia except in some other countries where Montefibre had the exclusive rights to sell. Montefibre also agreed to grant to the assessee-company a non-exclusive royalty-free licence on the assessee agreeing to grant to Montefibre an exclusive royalty-free licence with the right to sub-licence anywhere in the world any improvements developed by the assessee-company. Tecnimont is to work out the basic design of the plant on the basis of Montefibre technical knowledge to the assessee-company. In case of delay in the delivery of the technical documentation Tacnimont has to compensate the assessee-company by paying stipulated liquidator's damages. There is also a provision for the association of the assessee-company's engineers with Technimont. Tecnimont shall furnish the assessee-company with technical assistance and advice from the process point of view in connection with the erection of the plant and make available a team of experts for erection, etc. There is also elaborate provision for the training of the personnel by Tecnimont. Articles 5.5.1 and 5.5.2 provided that the agreement was to last for a period of 7 years. The advice to be given by Tecnimont was also to last for a period of 7 years. Everything that is undertaken by Tecnimont to the assessee was to last only a period of 7 years (see in this context Articles 5.5.1 and 5.5.2). Article 6.8 provided that in case the trial runs after the erection of the plant result in failure, the assessee-company and Tecnimont will meet to examine their respective liabilities and come to a friendly settlement taking into consideration the results obtained by the test runs, the liability of Tecnimont being limited to the financial implication provided under the agreement. Article 8 provided that no expansion of the plant or construction of the new plant either in India or anywhere in the world using the process supplied by Tecnimont shall have to be according to the separate agreement entered into with Tecnimont. Article 9 provided for the payment of the fees which is in the following terms :

9.1 The fees to be paid by JK to TEC for the use of the know-how in India, basic design engineering and technical assistance provided for herein is 623 (Six hundred and twenty-three) million Italian lire consisting of:
(a) 186,500,000, (One hundred eighty-six million five hundred thousand) Italian lire for the grant of the process and know-how licence under Article 2 ;
(b) 250,000,000 (Two hundred and fifty million) Italian lire for the supply of the know-how and basic design engineering as referred to in Article 3 ;