S.P Bharucha, J.:— These two references under section 256(1) of the Income-tax Act, 1961, concern the same assessee and can conveniently be disposed of together. Income-tax Reference No. 350 of 1975 concerns the assessment years 1964-65 to 1968-69. Income-tax Reference No. 39 of 1975 concerns the assessment years 1969-70 and 1970-71.

2. The questions posed in Income-tax Reference No. 350 of 1975 read thus:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs. 60,309 +Rs. 6,748+Rs. 11,000-f-Rs. 24,243+Rs. 20,527+Rs. 46,709, which was included by the Income-tax Officer in the total amount of ‘entertainment expenditure’ of the assessee for the assessment years 1964-65, 1965-66, 1966-67, 1967-68 and 1968-69, was not expenditure in the nature of entertainment expenditure falling within the ambit of section 37(2) of the Income-tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amounts of Rs. 6,286, Rs. 39,260, Rs. 1,29,153, Rs. 2,56,680 and Rs. 2,70,610 paid by the assessee to its foreign collaborator, M/s. Agrom (France), for the assessment years 1964-65, 1965-66, 1966-67, 1967-68 and 1968-69 as technical fees in pursuance of clause 21(1)(b) of the agreement dated July 25, 1961, between them was allowable revenue expenditure and not capital expenditure?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amounts of Rs. 25,080, Rs. 23,272, Rs. 8,966, Rs. 50,850 and Rs. 81,277 paid by the assessee to its foreign collaborator, M/s. M.A.N (West Germany), for the assessment years 1964-65, 1965-66, 1966-67, 1967-68 and 1968-69 as technical fees in pursuance of clause 12(b) of the agreement dated November 1, 1958, between them was allowable revenue expenditure and not capital expenditure?

(4) Whether, on the facts and in the circumstances of the case, the profits of Rs. 1,80,116 and Rs. 10,84,356 earned on the sale of the imported dry fruits qualify for relief under section 80E/80-I of the Income-tax Act, 1961, for the assessment years 1967-68 and 1968-69?”

3. The questions posed in Income-tax Reference No. 39 of 1975 read thus:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the profits which the assessee-company earned by the import and sale of dry fruits for the assessment year 1969-70 were profits ‘attributable to’ its ‘priority industry’, namely, manufacture and sale of oil engines, within the meaning of section 80-1 of the Income-tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 7,59,868 paid by the assessee to its foreign collaborator, M/s. Agrom (France), for the assessment year 1969-70 as technical fees in pursuance of clause 21(1)(b) of the agreement dated July 25, 1961, between them was allowable revenue expenditure and not capital expenditure?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 66,366 paid by the assessee to its foreign collaborator, M/s. M.A.N (West Germany), for the assessment year 1969-70 as technical fees in pursuance of clause 12(b) of the agreement dated November 1, 1958, between them was allowable revenue expenditure and not capital expenditure?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 12,48,124 paid by the assessee to its foreign collaborator, M/s. Agrom (France), for the assessment year 1970-71 as technical fees in pursuance of clause 21(1)(b) of the agreement dated July 25, 1961, between them was allowable revenue expenditure and not capital expenditure?”

4. We shall deal with the questions under three broad heads: (i) regarding the profits made on the sale of dry fruits, (ii) regarding the payments made to the foreign collaborators, and (iii) regarding what were termed as entertainment expenses. The assessee is engaged in the business of manufacture and sale of oil engines. Such activity is covered by Item 5 of the Sixth Schedule to the Income-tax Act, 1961. Consequently, the assessee carries on a priority industry as defined by section 80B of the said Act. The assessee is entitled, under section 80-1 of the said Act, to deductions from its gross total income where such income includes any profits and gains attributable to the priority industry. The assessee exports its oil engines. Under the Export Promotion Scheme in force for the relevant years, the Export Promotion Council issued to the assessee import licences for the import of dry fruits. The assessee imported the dry fruits and sold them and made profits. The assessee claimed deductions under section 80-1 in respect of such profits, contending that these were profits and gains attributable to its priority industry. The Income-tax Officer disallowed the assessee's claim. The Appellate Assistant Commissioner, on the assessee's appeal, took the same view. The assessee appealed to the Income-tax Appellate Tribunal.

5. The Tribunal observed that the expression “attributable to” covered a wider field than that covered by the expression “derived from In using the expression” attributable to”, Parliament had intended to cover sources beyond the first degree. The immediate and effective source of the profits, that is, the direct source or the source of the first degree, were the dry fruits. The source of the dry fruits was the import licence. In its turn, the source of the import licence was the export. The export was possible only because of the manufacture of the oil engines. So, the source of the export was the manufacture of the oil engines. Hence, it was this manufacture of oil engines which ultimately gave rise to the profits. It was, therefore, possible to trace the source of the profits to the manufacture. The manufacture was the foundation of the profits. It might be that the second, third and fourth degrees, that is, the sale of the dry fruits, the export of the oil engines and their manufacture, were remote from the profits earned; but there was a traceable relationship. They had also contributed to the earning of profits and, if anything contributed to the creation of any other thing, then it could well be said that the thing so created was attributable to the thing which gave rise to its existence.

6. The references are made at the instance of the Revenue.

7. It was contended by Mr. Jetly, learned counsel for the Revenue, that the expression “attributable to” could not be stretched as far as the Tribunal has done. Mr. Inamdar, learned counsel for the assessee, submitted that the profits made from the sale of dry fruits were inextricably bound with the manufacture of the oil engines. He contended that no business had been done by the assessee in dry fruits, but that the sale thereof had been effected on its behalf by an agent. Our attention was drawn by Mr. Inamdar to the Supreme Court judgment in Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84. The learned judges of the Supreme Court there held that where the expression of wider import, namely, “attributable to”, had been used, the Legislature intended to cover receipts from sources other than the actual conduct of the priority business. Our attention was also drawn to two judgments of the Madras High Court, CIT v. Universal Radiators P. Ltd., [1981] 128 ITR 531 and Shardlow India Ltd. v. CIT, [1981] 128 ITR 571. In both the cases, the assessees had sold the import entitlements granted as export incentives. It was held that the profits on the sale were directly attributable to the priority industry.

8. As the Tribunal has noted, the profits earned from the sale of the dry fruits were only remotely linked to the manufacture of the oil engines. In our view, it is not enough that there should be a traceable relationship between the profits earned and the priority industry. The profits must be more closely linked to the priority industry for it to be held that they were attributable to it. Profits realised upon the sale of the import entitlements are so closely and directly linked as to be attributable to the priority industry. But where the assessee has itself utilised the import entitlements, imported goods and sold them, the profits so earned are too remotely linked to be attributable to the priority industry. Such profits would not qualify for relief under section 80-1 of the Income-tax Act, 1961.

9. In our view, therefore, the Tribunal was not right in holding that the profits which the assessee earned by the sale of dry fruits were profits attributable to its priority industry, namely, the manufacture and sale of oil engines, within the meaning of section 80-1 of the Income-tax Act, 1961.

10. We turn now to the payments made by the assessee to its foreign collaborators, M/s. Agrom and M/s. M.A.N The assessee's agreement with M/s. Agrom is dated July 25, 1961. Thereunder M/s. Agrom granted to the assessee an exclusive licence to manufacture and sell certain types of diesel engines and their components and spares. The agreement was for a duration of ten years. Under clause 21, thereof remuneration was to be paid by the assessee to M/s. Agrom calculated at 3% on the net sale proceeds of the engines and spare parts manufactured and sold by the assessee. This remuneration was for the technical assistance and information to be supplied under clauses 9, 10 and 11 of the agreement. Clauses 9 and 10 required M/s. Agrom to supply to the assessee drawings, specifications and other technical information and under clause 11, M/s. Agrom was obliged to supply dimensional drawings. The agreement also required M/s. Agrom to train the assessee's technicians and to provide technical personnel to the assessee. The agreement with M/s. M.A.N was on the same lines and provided for payment of remuneration at the rate of 3% of the net sale proceeds of M.A.N type engines manufactured and sold by the assessee.

11. The Income-tax Officer declined to treat the fees paid by the assessee to M/s. Agrom and M/s. M.A.N as revenue expenditure. The Appellate Assistant Commissioner upheld the assessee's appeal. The Revenue went up to the Income-tax Appellate Tribunal, but the appeal was dismissed. Reliance was placed by the Tribunal upon the judgments of the Supreme Court in CIT v. Ciba of India Ltd., [1968] 69 ITR 692 and Devidas Vithaldas & Co. v. CIT, [1972] 84 ITR 277.

12. Our judgment in *Gannon Norton Metal Diamond Dies Ltd. v. Commissioner Of Income-Tax, delivered in Income-tax Reference No. 1 of 1976 on October 19, 1983, squarely applies to the instant case. After considering the judgments of the Supreme Court and of various High Courts we have held that fees paid to collaborators for the acquisition of technical information and know-how constitutes expenditure of a revenue nature. In its light, we must hold that the fees paid by the assessee to its foreign collaborators was allowable revenue expenditure.

13. No separate account for entertainment expenditure was maintained by the assessee in its books. However, the Income-tax Officer took the view that certain items of expenditure debited by the assessee to various other accounts were classifiable as entertainment expenditure. He culled out such items and restricted the allowance in respect thereof to the maximum prescribed under section 37(2). Out of the items so culled out, objection was taken in the appeal filed by the assessee before the Appellate Assistant Commissioner to the amounts of Rs. 60,308 paid to certain hotels and clubs, Rs. 46,709 being the value of presentation articles given to foreign distributors and Rs. 11,000 incurred on the inland travel of foreign distributors. It was stated, on behalf of the assessee, that a seminar had been arranged during the assessment year 1964-65 of the foreign and local distributors of the assessee with a view to boosting the assessee's sales, particularly in the foreign market. Since the assessee's guest-house was small, accommodation was arranged in hotels and clubs. The expenditure so incurred was not entertainment expenditure. The Appellate Assistant Commissioner and the Tribunal upheld the assessee's contention. The Appellate Assistant Commissioner and the Tribunal also accepted the assessee's contention that it was a customary practice to give presentation articles to foreign distributors when they visited the assessee's factory and that the expenditure of Rs. 6,748 incurred in this behalf was not entertainment expenditure. The Appellate Assistant Commissioner and the Tribunal also accepted the assessee's contention that the sum of Rs. 11,000, being the expenditure incurred in connection with the inland travel of the foreign distributors, was not entertainment expenditure.

14. In our view, none of these items of expenditure can be considered to be entertainment expenditure. The seminar was arranged in connection with the assessee's business. The expenditure for travel, boarding and lodging of the assessee's distributors attending the seminar was expenditure incurred in connection with the assessee's business. So was the expenditure involved in giving presentation articles to the assessee's foreign distributors. In this view of the matter, we answer the questions thus:

In Income-tax Reference No. 39 of 1975:

(1) In the affirmative and in favour of the assessee.

(2) In the affirmative and in favour of the assessee.

(3) In the affirmative and in favour of the assessee.

(4) In the affirmative and in favour of the assessee.

In Income-tax Reference No. 350 of 1975:

(1) In the affirmative and in favour of the assessee.

(2) In the affirmative and in favour of the assessee.

(3) In the affirmative and in favour of the assessee.

(4) In the negative and in favour of the Revenue.

15. There shall be no order as to costs.