Desai, J.:— In this reference one question was originally referred to us under s. 66(1) of the Indian I.T Act, 1922. After the aforesaid reference, both the parties preferred applications to the High Court being Income-tax Applications Nos. 3 of 1968 and 41 of 1968, respectively, and the following further two questions were referred to us, the first of them being at the instance of the Commissioner and the second question being at the instance of the assessee. These three questions may now be set out being designated respectively as questions Nos. 1, 2 and 3, question No. 1 being the original question referred under s. 61(1) and questions Nos. 2 and 3 being the questions directed to be referred under s. 66(2) at the instance of the Commissioner and the assessee, respectively.

Question No. 1.

“Whether, on the facts and in the circumstances of the case, the fencing round the refinery processing units constituted plant so as to be entitled to depreciation and rebate?”

Question No. 2:

“Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that 50% of the sum of Rs. 2,97,415 being the payment of royalty charges could be allowed deduction as revenue expenditure?”(Commissioner's question).

Question No. 3;

“Whether the 25% of Rs. 2,97,415 could be included in the cost of machinery and plant for the purpose of depreciation and development rebate? (assessee's question).

2. As far as question No. 1 is concerned, counsel are agreed that the said question is to be answered in the affirmative and in favour of the assessee in view of the decision of this court in CIT v. Caltex Oil Refining (India) Ltd., [1976] 102 ITR 260 (Bom). As far as the remaining two questions are concerned, they pertain to payments made during the assessment year 1958–59 which, it may be mentioned, was the first assessment on the company. The assessee-company was established to produce gasoline from crude oil and market the product. For this purpose, two different processes were to be utilised, viz., (1) by the polymerization of hydrocarbon gases using a catalyst and (2) Asphalt separation process with the aid of liquid propane. For the former process, the assessee entered into a collaboration agreement with the California Research Corporation, Delaware (hereinafter referred to as “Calresearch”). For the latter process also, there was a foreign collaboration, the foreign collaborators being Esso Research and Engineering Company (hereinafter referred to as “Esso”). Both the agreements were on similar terms, though the first was to run till January, 1963, whereas the latter was for a period of 10 years.

3. In 1957, a royalty amount of Rs. 2,49,829 was paid to Calresearch and Rs. 47,586 to Esso. Before the ITO, the company claimed depreciation on these amounts treating them as part of the cost of machinery. The ITO held that the payments were for use of process and could not be added to the cost of machinery. In appeal before the AAC, the decision of the ITO was confirmed, the AAC observing that the expenditure could not be allowed as revenue expenditure because it had been incurred prior to the commencement of the business and further because it had been capitalised by the company itself. In further appeal before the Tribunal, the company was able to prove that the expenditure was incurred only after the commencement of business. The Tribunal observed that the nature of the expenditure cannot depend on the treatment accorded to it in the company's accounts. The assessee's modified claim before the Tribunal was for outright deduction of 50% of the total sum of Rs. 2,97,415 as running royalty and for depreciation on the balance of 50% by treating it as part of the cost of the machinery. In its order, the Tribunal considered the clauses of the agreement between the assessee and Calresearch and observed that it was on the usual pattern of technical collaboration agreement. According to the Tribunal, under the agreement, the technical assistance to be given to the assessee consisted of (1) supply of know-how, processes and patent, etc., (2) rendering of technical services and assistance by way of supplying designs, plans and rendering of assistance in setting up of the plants, and (3) licensing the Indian concern for manufacturing and dealing in the non-resident's products and using its patents and processes. In the view of the Tribunal, the basis of 50% of this amount to be allowed as revenue expenditure, as suggested by the counsel for the assessee who appeared before the Tribunal, was reasonable in the facts and in the circumstances of the case. The Tribunal accordingly directed that 50% of the sum of Rs. 2,97,415 should be allowed as an outright deduction. It is this decision of the Tribunal which has aggrieved the revenue and resulted in question No. 2 being referred to us at the instance of the Commissioner.

4. The Tribunal then considered the balance of 50% of this amount. It observed that to the extent that commuted royalty payment was for the supply of know-how, there would be no justification for increasing the cost of machinery and accordingly it divided the balance of 50% into two equal parts allowing 25% (i.e, ½) as capital expenditure on which depreciation and development rebate were admissible and holding that the balance 25% was capital expenditure on which neither depreciation nor development rebate were admissible. It is this decision which has aggrieved the assessee at whose instance question No. 3 has been referred to us.

5. The licence agreement between the assessee and Calresearch is annexure “1 “to the supplementary statement of claim. The agreement recites that Calresearch is granting to the assessee a non-exclusive licence under Calresearch's patent rights and technical assistance to employ process throughout the world. The technical assistance to be given to the assessee is indicated under art. 5.0 Art. 6.0 speaks of the royalty to be paid by the assessee to Calresearch and the details of calculations of such royalty are to be found in Sch. “B”. Art. 3.1 makes it clear that the licence granted under Calresearch's patent rights and technical assistance is non-exclusive as well as non-transferable.

6. We thus have an agreement of a limited duration granting to the assessee the right to use certain processes of the collaborator for a limited duration, it being made clear that the licence is non-transferable and nonexclusive. Mr. Joshi, however, very strongly relied upon art. 7.3 which may be-fully extracted:

“From and after the effective date of any termination of this agreement, the licensee shall have no further rights hereunder, except any fully paid licence(s) to use the process theretofore acquired by the licensee under article 6.0 hereof, provided, however, that said licence(s) shall not extend to the use of inventions conceived after the effective date of any termination.”

7. It was submitted that the amount had been paid by the licensee for acquisition of an enduring advantage or benefit and, therefore, the amount must be regarded as having been paid on capital account. It was accordingly submitted that the Tribunal was in error in allowing 50% of this amount as a full deduction treating the payment as having been made on revenue account.

8. We have carefully considered the provisions of cl. 7.3 It undoubtedly talks of the assessee-company being entitled to utilise even after the period of the agreement the fully paid licence(s), but when one turns to art. 6.0 referred to in this article or even to Sch. “B”, which is referred to in art. 6.1, which is the only article in 6.0, we do not find any provision for an outright purchase of a licence of the collaborator by the assessee. Merely on the basis of the theoretical provision without a further provision for such outright purchase being found in collaboration agreement or as a matter of actual fact, it is difficult to agree with Mr. Joshi's submission that the amount was paid for acquiring assets of enduring nature. In any case, the Tribunal has not allowed the full amount on revenue account. The Tribunal has made a reasonable assessment and apportioned 50% to revenue account and 50% to capital account and it is difficult to find fault with the approach of the Tribunal in this behalf. It is impossible to hold that no part of this amount can be allowed on revenue account. It is also difficult to say that the Tribunal has allowed an exaggerated portion of this amount, i.e, 50% on revenue account. If that be our conclusion, then question No. 2 referred to us at the instance of the Commissioner will be required to be answered in favour of the assessee.

9. That brings us to question No. 3. Before the Tribunal, the assessee had submitted that the full remaining 50% should be added to the cost of the plant since it pertains to design, know-how as to how the plant was to-be operated, etc. Reliance was placed before the Tribunal on a decision of this High Court in Habib Hussein v. CIT, [1963] 48 ITR 859 (Bom), in which expenditure incurred in getting prepared suitable plans and designs was allowed to be added to the cost of construction of a building. On a similar basis, it was submitted that the entire balance amount was required to be added to the cost of the plant and depreciation and development rebate allowed on that basis.

10. On going through the order of the Tribunal, we do not find any real basis for apportioning this balance of 50% treated as on capital account into two equal parts of 25% of the total amount and allowing depreciation and development rebate only on 25% and not on the full balance of 50%. The Tribunal has very briefly stated that this was done taking all the facts into consideration. It would appear to us that there was no material before the Tribunal to hold that any part out of this 50% treated as on capital account was not pertaining to the erection of the plant or to the design and know-how for running thereof. If that be the correct view, then on the material before the Tribunal there was no warrant for treating any part of this 50% as one of which depreciation and development rebate were not admissible. In this view of the matter, we are of the opinion that question No. 3 referred to us at the instance of the assessee will be required to be answered in favour of the assessee. In the result, the questions are answered as follows:

Question No. 1.— In the affirmative and in favour of the assessee.

Question No. 2.— In the negative and in favour of the assessee.

Question No. 3.— In the affirmative and in favour of the assessee.

11. Although the assessee has succeeded, the parties are directed to bear their own costs.