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Catalysts & Chemicals v. Commissioner Of Income-Tax, Ernakulam
Summary of Legal Opinion
Factual and Procedural Background
The assessee company was formed pursuant to a collaboration agreement between A. Laljee Sons & Co. ("Laljee") in India and Catalysts and Chemicals Inc. ("C.C.I.") in the U.S.A. The agreement required C.C.I. to provide overall technical knowhow, including manuals, patents, processes and trademark rights, and to supply certain equipment and training. Under the agreement the assessee agreed to pay a series of amounts, which together included an amount whose rupee equivalent was Rs. 18,75,000 (the equivalent of U.S. £170,000), for the knowhow and related rights and services.
On 29-6-1970 (recorded in the opinion) three manuals containing technical information were delivered to the assessee for exclusive use. For the accounting/assessment year 1971–72 (accounting year ending 31-12-1970) the assessee claimed development rebate and depreciation at 15% on the sum of Rs. 18.75 lakhs, treating that amount as representing the value of books/technical knowhow (and as plant within S.43(3) of the Income-tax Act). The Income-tax Officer and the Appellate Assistant Commissioner rejected (in differing terms) the full claim: the Income-tax Officer held that technical knowhow was not a tangible asset under S.33, and the Appellate Assistant Commissioner treated the acquisition as a valuable right (patents, processes, trademark rights) rather than books eligible for depreciation/development rebate.
The matter proceeded to the Income-tax Appellate Tribunal (Cochin Bench). The Tribunal applied tests (form, function and substance) and held that the three manuals were books in form and function and, in substance, but found that the Rs. 18.75 lakhs was paid for a bundle of rights (including present and future knowhow and other rights) and not solely for the manuals. The Tribunal therefore allocated only part of the total consideration to the manuals and fixed their cost at Rs. 25,000/-, allowing depreciation and development rebate on that amount.
The Tribunal referred two questions for determination: (1) at the instance of the Department, whether the Tribunal was justified in holding that the three manuals were books in form and substance and constituted tools of the trade attracting depreciation and development rebate as plant; and (2) whether the Tribunal was justified in fixing the cost of the three manuals at Rs. 25,000/-, a question referred at the instance of both Department and assessee.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, and on the interpretation of the agreement dated 21-2-1969, the Appellate Tribunal was justified and had materials before it in holding that the three manuals acquired by the assessee are books in form as well as in substance and they constitute tools of the trade attracting depreciation and development rebate as plant?
- Whether on the facts and circumstances of the case the Appellate Tribunal was justified in fixing the cost of the three manuals at Rs. 25,000/-?
Arguments of the Parties
Department / Revenue
- The Department challenged the Tribunal's conclusion that the three manuals were books eligible to be treated as 'plant' attracting depreciation and development rebate.
- The Department also challenged the Tribunal's fixation of the value of the three manuals at Rs. 25,000/-, contending that the valuation was not justified.
Assessee
- The assessee contended that the sum of Rs. 18.75 lakhs represented the cost of the technical knowhow, that the knowhow was embodied in the three manuals, and therefore the entire amount should be regarded as the cost of books (or plant) eligible for depreciation and development rebate.
- The assessee relied on the decision of the Gujarat High Court in Commissioner of Income-Tax, Gujarat-II v. Elecon Engineering Co. Ltd. (96 ITR 672) to support the contention that the manuals should be treated as 'books' and hence as 'plant'.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-Tax, Gujarat-II v. Elecon Engineering Co. Ltd. (96 ITR 672) | That a 'book' within the meaning of 'plant' requires a dual test: it must be a book in form and functionally a tool of the business or profession (i.e., used for business/professional purposes). | The Court reiterated the dual test from this decision and noted that the Tribunal added a further qualification of 'in substance' being a book. Applying these tests, the Court agreed with the Tribunal that the three manuals satisfied the tests (form and functional utility, and the Tribunal's additional 'substance' test) and therefore could be treated as books falling within the definition of 'plant' under S.43(3). |
Court's Reasoning and Analysis
The Court's analysis proceeded in the following steps, based strictly on the content of the opinion:
- Statutory definition: The Court considered S.43(3) of the Income-tax Act, which defines "plant" and expressly includes "books" among examples of plant used for the purposes of business or profession. This statutory inclusion means that books that are tools of the business/profession may be treated as plant.
-
Clarification of meaning: The Court explained that while the dictionary definition of "book" covers a wide variety of bound sheets, the term as used in S.43
Summary of Legal Opinion
Factual and Procedural Background
The assessee company was formed pursuant to a collaboration agreement between A. Laljee Sons & Co. ("Laljee") in India and Catalysts and Chemicals Inc. ("C.C.I.") in the U.S.A. The agreement required C.C.I. to provide overall technical knowhow, including manuals, patents, processes and trademark rights, and to supply certain equipment and training. Under the agreement the assessee agreed to pay a series of amounts, which together included an amount whose rupee equivalent was Rs. 18,75,000 (the equivalent of U.S. £170,000), for the knowhow and related rights and services.
On 29-6-1970 three manuals containing technical information were delivered to the assessee for exclusive use. For the accounting/assessment year 1971–72 (accounting year ending 31-12-1970) the assessee claimed development rebate and depreciation at 15% on the sum of Rs. 18.75 lakhs, treating that amount as representing the value of books/technical knowhow (and as plant within S.43(3) of the Income-tax Act). The Income-tax Officer and the Appellate Assistant Commissioner rejected (in differing terms) the full claim: the Income-tax Officer held that technical knowhow was not a tangible asset under S.33, and the Appellate Assistant Commissioner treated the acquisition as a valuable right (patents, processes, trademark rights) rather than books eligible for depreciation/development rebate.
The matter proceeded to the Income-tax Appellate Tribunal (Cochin Bench). The Tribunal applied tests (form, function and substance) and held that the three manuals were books in form and function and, in substance, but found that the Rs. 18.75 lakhs was paid for a bundle of rights (including present and future knowhow and other rights) and not solely for the manuals. The Tribunal therefore allocated only part of the total consideration to the manuals and fixed their cost at Rs. 25,000/-, allowing depreciation and development rebate on that amount.
The Tribunal referred two questions for determination: (1) at the instance of the Department, whether the Tribunal was justified in holding that the three manuals were books in form as well as in substance and they constitute tools of the trade attracting depreciation and development rebate as plant; and (2) whether the Tribunal was justified in fixing the cost of the three manuals at Rs. 25,000/-, a question referred at the instance of both Department and assessee.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, and on the interpretation of the agreement dated 21-2-1969, the Appellate Tribunal was justified and had materials before it in holding that the three manuals acquired by the assessee are books in form as well as in substance and they constitute tools of the trade attracting depreciation and development rebate as plant?
- Whether on the facts and circumstances of the case the Appellate Tribunal was justified in fixing the cost of the three manuals at Rs. 25,000/-?
Arguments of the Parties
Department / Revenue
- The Department challenged the Tribunal's conclusion that the three manuals were books eligible to be treated as 'plant' attracting depreciation and development rebate.
- The Department also challenged the Tribunal's fixation of the value of the three manuals at Rs. 25,000/-, contending that the valuation was not justified.
Assessee
- The assessee contended that the sum of Rs. 18.75 lakhs represented the cost of the technical knowhow, that the knowhow was embodied in the three manuals, and therefore the entire amount should be regarded as the cost of books (or plant) eligible for depreciation and development rebate.
- The assessee relied on the decision of the Gujarat High Court in Commissioner of Income-Tax, Gujarat-II v. Elecon Engineering Co. Ltd. (96 ITR 672) to support the contention that the manuals should be treated as 'books' and hence as 'plant'.
Table of Precedents Cited
Precedent Rule or Principle Cited For Application by the Court Commissioner of Income-Tax, Gujarat-II v. Elecon Engineering Co. Ltd. (96 ITR 672) That a 'book' within the meaning of 'plant' requires a dual test: it must be a book in form and functionally a tool of the business or profession (i.e., used for business/professional purposes). The Court reiterated the dual test from this decision and noted that the Tribunal added a further qualification of 'in substance' being a book. Applying these tests, the Court agreed with the Tribunal that the three manuals satisfied the tests (form and functional utility, and the Tribunal's additional 'substance' test) and therefore could be treated as books falling within the definition of 'plant' under S.43(3). Court's Reasoning and Analysis
The Court's analysis proceeded in ordered steps based strictly on the text of the opinion:
- Statutory framework: The Court examined S.43(3) of the Income-tax Act, noting that "plant" expressly includes "books" used for the purposes of the business or profession. Thus, books may be treated as plant if they function as tools of the business.
- Meaning of "book" in context: The Court contrasted the broad dictionary meaning of "book" (any collection of sheets bound together) with the narrower meaning within the Income-tax Act, where the term must be read in the functional context — i.e., a book must be used for business or professional purposes to qualify.
- Tests applied by Tribunal: The Tribunal applied three tests: whether (a) the manuals were books in form, (b) whether they were books functionally (i.e., served the business), and (c) whether they were books in substance. The Court accepted that the Tribunal correctly applied the accepted dual test (form and function) as expounded by the Gujarat High Court and noted the Tribunal's further qualification of "substance."
- Application to the facts: The Court found that the three manuals contained all necessary technical information for setting up the plant, commencing production and ensuring product quality. Given that information was necessary for the assessee's business operations, the manuals satisfied the tests of form and functional utility (and, per the Tribunal, substance) and accordingly could be treated as books within the meaning of "plant."
- Character of the overall payment: The Court examined the agreement and the rights/obligations it created. It concluded that the Rs. 18.75 lakhs payment was not made solely for the three manuals but covered a bundle of rights and services, including patent and trademark rights, obligations to pass future knowhow during the period of the agreement, and training obligations (sending personnel to and from the U.S.), among others. The Tribunal had explicitly found that the payment conferred "certain rights" and that one of these rights was the right to present and future knowhow.
- Assessee's contention rejected: The Court rejected counsel for the assessee's argument that the entire Rs. 18.75 lakhs should be treated as the cost of the manuals because (i) the agreement itself allocated the consideration across multiple items and obligations, (ii) additional grounds of appeal indicated the assessee did not assert the entire amount was only for the manuals, and (iii) the Tribunal's finding that the payment was for a bundle of rights was unchallenged and remains binding.
- Valuation issue: On whether the Tribunal properly fixed the cost of the three manuals at Rs. 25,000/-, the Court found that the Tribunal's determination lacked factual basis in the order and appeared arbitrary. There was no explanation in the Tribunal's order how the Rs. 25,000 figure was derived. Consequently, the Court held that the fixation could not be sustained on the record before it.
Holding and Implications
Holding:
- As to Question No. 1: The Court answered in the affirmative. The three manuals were books in form and function (and, as the Tribunal qualified, in substance) and therefore fell within the definition of "plant" under S.43(3) for the purposes of depreciation and development rebate. This answer is against the Department and in favour of the assessee.
- As to Question No. 2: The Court held that the Tribunal's fixation of the cost of the three manuals at Rs. 25,000/- was not properly supported by the record and thus the Tribunal's valuation could not be sustained; accordingly the answer to whether the Tribunal was justified in fixing the cost at Rs. 25,000/- is negative.
Implications:
- Direct effect on the parties: The Court upheld the classification of the three manuals as books/plant for tax purposes, which supports the assessee's entitlement to depreciation and development rebate in respect of those manuals. However, the Tribunal's numerical allocation of Rs. 25,000 as the cost of those manuals was found arbitrary and unsupported; the valuation issue was not sustained on the record before the Court.
- On further proceedings: The opinion records that the Tribunal's factual finding that the Rs. 18.75 lakhs was paid for a bundle of rights (one of which was the manuals/knowhow) was not challenged and therefore stands. The Court did not itself reallocate the Rs. 18.75 lakhs among the various items; it only held that the Tribunal's specific determination of Rs. 25,000 lacked support. The opinion does not prescribe a new valuation or instruct a particular method for allocation in this document.
- Precedential impact: The Court applied established tests (as found in the cited Gujarat High Court decision) and affirmed that books which function as tools of the business may be treated as plant. The opinion does not purport to establish a novel legal principle beyond applying the statutory definition and the settled tests; the direct legal consequence is the sustenance of the classification of the manuals as books/plant while rejecting the specific valuation made by the Tribunal.
The Judgment of the Court was delivered by
Subramonian Poti, A.C.J:— The Income-tax Appellate Tribunal, Cochin Bench has referred the following two questions, question No. 1 at the instance of the Department and question No. 2 at the instance of both the Department and the assessee. The questions are:
At the instance of the Department
“(1) Whether, on the facts and in the circumstances of the case, and on the interpretation of the agreement dated 21-2-1969, the Appellate Tribunal was justified and had materials before it in holding that the three manuals acquired by the assessee are books in form as well as in substance and they constitute tools of the trade attracting depreciation and development rebate as plant?
Common question
(2) Whether on the facts and circumstances of the case the Appellate Tribunal was justified in fixing the cost of the three manuals at Rs. 25,000/-?”
2. The facts which give rise to these questins are these: The assessee Company was floated as a result of a collaboration agreement between A. Laljee Sons & Co. (referred to in this judgment as ‘Laljee’), a firm in India and Catalysts and Chemicals Inc (for brief referred to as ‘CCI’ in this judgment), a company in U.S.A It was for producing catalysts that the collaboration agreement was reached and this had been approved by the Government of India in principle. Annexure A is the agreement between A. Laljee Sons & Company and C.C.I The C.C.I in the States was to provide the Company with the overall technical knowhow. Since the relative clause is relevant for the purpose of this reference it is useful to extract that clause:
“2(b) At the time the shares are offered for subscription, CCI shall deliver to the company such equipment as can only be obtained outside India and having a value equal to U.S dollars 1,05000 and being the sum equivalent to the par value of 7875 shares of Rs. 100/-. At the same time the company shall further issue to CCI 1500 shares as fully paid up shares of a par value of 1,50,000/- rupees (representing the rupee equivalent of U.S dollars 20,000 at the official rate of exchange of 7.50 rupees for each U.S dollar) as a down payment to CCI for agreeing to provide to the Company all its existing knowhow patents and processes and trademark rights in relation to the catalysts listed above with the exception of the catalytic reforming catalysts, with further payments to be made in accordance with paragraphs 2(c) and 5 herein”.
3. In return for the technical knowhow the C.C.I, was to be paid a price of U.S £ 1,70,000 free of Indian taxes. This is covered by paragraph 4 of the agreement which runs.
“The parties agree to cause the company to pay to CCI for its know-how, patents, processes and trademark rights the further amount of U.S £ 1,70,000 free of Indian Taxes in four instalments as follows:
$ 40,000 when commercial manufacturing commences
$ 40,000 twelve (12) months after the
manufaturing has commenced
$ 45,000 twenty four (24) months after the
manufacturing has commenced.
$ 45,000 thirty six (36) months after the
manufacturing has commenced.
Such payments shall be in addition to the U.S £ 20,000 referred to in paragraph 2(b) and the U.S $ 60,000 referred to in paragraph 2(c)”.
4. Evidently the obligation of the C.C.I, under the agreement was: (1) providing technical knowhow consisting of a complete description of the composition of all catalysts, raw materials and their specifications, quality control tests, engineering drawings of all process schemes etc.; (2) during the duration of the agreement the Company was to be provided with the additional knowhow, patents etc; and (3) qualified Indian personnel was to be trained by C.C.I, by sending to India qualified C.C.I personnel. The equivalent of the amount of £ 170,000 was a sum of Rs. 18,75,000/-. The Government of India approved the agreement in principle. The Company was floated. On 4th May, 1970, Sri. Laljee on behalf of the assessee company received intimation from the C.C.I requesting him to go over to the U.S so that he may take over the technical knowhow manuals, finalise the factory and equipment designs, training of personnel etc. On 29-6-1979 three books or manuals containing information of the necessary technical details in the production of catalyats was received by Sr. Laljee. It was recorded in the letter that the three manuals were for the exclusive use of the Indian company and no portion thereof may be disclosed to other persons.
5. For the assessment year 1971-1972, the corresponding accounting year for which was that ending on 31-12-1970, the assessee company filed a return showing a net loss of Rs. 21.03 lakhs. In arriving at this loss an amount of 15% on the sum of Rs. 18.75 lakhs paid to C.C.I by the assessee company under the terms of the contract was claimed by way of development rebate and depreciation. The case of the assessee was that the above said amount of Rs. 10.75 lakhs represented the value of books containing technical knowhow and books being plants within the meaning of S. 43(3) of the Income-tax Act, development rebate and depreciation could be claimed thereon. The Income-tax Officer did not agree with this. He was of the opinion that technical knowhow was not a tangible asset within the meaning of S. 33 of the Income-tax Act and so the claim was not admissible. Before the Appellate Assistant Commissioner it was argued that Rs. 18,75,000/- represented the value of the technical knowhow purchased by the appellant and that the technical knowhow was in the shape of books. But the Appellate Assistant Commissioner felt that what were acquired were not books, but a valuable right covering the right to patents, processes and trademarks and therefore there was no provision for depreciation and development rebate in regard to the value of such acquisitions. The matter was taken to the Appellate Tribunal by the assessee. Ground No. 3 in the appeal concerned the plea that the technical knowhow should have been considered as a plant. Ground No. 4 concerned the refusal of development rebate on the ground that there was no reserve created Further grounds of appeal were filed by the assessee which were not disposed of by the Tribunal which dealt with the appeals. In the additional ground No. 5 the appellant had taken a point that the expenditure represented a plant within the meaning of S. 43(3). In ground No. 6 it was mentioned that the assessee was praying for the distribution of the impugned amount of Rs. 18.75 lakhs between capital expenditure and expenditure on patent and trademark. In ground No. 7 it was submitted that the expenditure should be allowed as a revenue deduction. The Tribunal which did not deal with the additional grounds in its original order passed a further order later.
6. Before the Tribunal the assessee relied on the decision of the Gujarat High Court in the Commissioner of Income-Tax, Gujarat-II v. Elecon Engineering Co. Ltd. (96 ITR. 672) in support of its case that the amount of Rs. 18.75 lakhs represented the cost of acquisition of books which should be taken as a ‘plant’. The Tribunal in considering the questions whether the manuals which contained the technical knowhow were books applied the following tests: (1) were the manuals in the form of books? (2) were the manuals books functionally? and (3) were the manuals in substance books and held that all the three tests were satisfied. If they were books they would fall within the definition of ‘plant’ and therefore development rebate and depreciation could be claimed on the value of books. But the Tribunal also found that the payment of Rs. 18.75 lakhs was made for the right to obtain the knowhow with its connected services and was not made merely to obtain the three manuals. It found that by paying Rs. 18.75 lakhs the assessee had obtained “certain rights” from the C.C.I, “one of which” was “the right to obtain present as well as the future knowhow”. It further found that this right bad an independent existence apart from the three manuals which contained the knowhow. Consistent with this finding it found that only a part of the cost of Rs. 18.75 lakhs could be considered as the cost of the three manuals. It determined the cost of these books at Rs. 25,000/- and allowed depreciation and development rebate thereon.
7. Evidently the question raised at the instance of the Department challenges the view taken by the Tribunal that the three manuals handed over by C.C.I to the assessee company were books. There is also challenge at the instance of the department to the fixation of the value of the books at Rs. 25,000/-. There is a similar challenge at the instance of the assessee that the value of the books should not have been fixed at Rs. 25,000/-. That is the purport of the second question.
8. We will now consider the first of the two questions referred, namely that referred at the instance of the Department. S. 43 of the Income-tax Act defines certain terms and one of the terms so defined is that in S. 43(3), namely “plant”. According to the definition “plant” includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession. Books would fall within the definition of “plant” provided they satisfied the qualification that they were “tools” of the business or profession. The Chambers Twentieth Century Dictionary defines ‘book’ as a collection of sheets of paper etc. bound together or made into a roll either printed, written on, or blank. Similar definitions we find in other dictionaries too. So in the larger sense sheets of paper written or unwritten brought together in a form would be a book, but in the definition of “plant” books are referred to in a more restricted sense, restricted by indication of the functional use of the books. Therefore it is not every book such as a diary or a cheque book that would satisfy the definition of a book. In the larger sense that could be said to be a book but in the sense in which its used in the Income-tax Act it must be one ‘used for the purposes of the business or profession’. In the case of a lawyer books relating to law and allied subjects would fall within the definition. In the case of a medical practitioner books relating to medicines and allied subjects would similarly fall within the definition of books. Thus the definition must satisfy as indicated by the High Court of Gujarat in the Commissioner of Income-tax Gujarat-II v. Elecon Engineering Co. Ltd. (96 ITR. 672) a dual test, that it should be a book, in form as well as functionally. To this the Tribunal added a further qualification that in substance also it must be a book.
9. The three manuals which were handed over by the C.C.I, contained all necessary technical information which the C.C.I wanted to convey to the assessee company so that the assessee company may set up its plant, commence its production and standardise and keep the quality of the product. Such information was necessary for the assessee company and the manual therefore satisfied the dual test of form as well as functional utility. The Tribunal was therefore right in holding that the three manuals handed over to the assessee company were books.
10. The second question is quite plain and easy to answer. But learned counsel for the assessee Sri Ram Panjwani contends that the entire technical knowhow that had to be conveyed by the C.C.I, to the assessee company were contained in the books and in fact and in truth there was nothing further of any material consequence that was contemplated as return for the sum of Rs. 18.75 lakhs. According to the counsel the overall technical knowhow which was what was bargained for by the assessee company in return for the sum of Rs. 18.75 lakhs was the content of the three books and as such the cost of the books should be found as Rs. 18.75 lakhs. We are afraid such an argument cannot be accepted for more than one reason. The agreement itself indicates that besides the passing of the technical knowhow the return for the sum of Rs. 18.75 lakhs covered the patent right, as well as the trademark rights. Besides these there was an obligation to pass on additional technical knowhow which the C.C.I, came into possession of during the period of 5 years. There was also an obligation to train personnel from India in the States, of course at the assessee's expense and also by sending technical personnel to India, that too at the assessee's expense. It was not as if once the three books were handed over the C.C.I could say “we have given you what you bargained for. You shall not expect anything more from us. We have discharged our obligation under the agreement. You cannot legally enforce any further obligation against us.” That of course is plainly not the case under the terms of the agreement. Even the additional grounds of appeal before the Income-tax Appellate Tribunal indicate that the assessee had no such case. In ground No. 6 before the Appellate Tribunal which is referred to in paragraph 9 of the statement of the case the assessee has prayed for distribution of the impugned amount of Rs. 18.75 lakhs between the capital expenditure and expenditure on patent and trademark. Even apart from the assessee conceding so the agreement itself is very plain on this. The Tribunal categorically found in its order that the amount of Rs. 18.75 lakhs was not only for the three manuals, but was in return for certain rights from the C.C.I, and one of the rights was the right to obtain present as well as future knowhow. There is no reference regarding the correctness of this finding. In fact so long as this finding of the Tribunal remains here is no scope for considering whether the sum of Rs. 18.75 lakhs was, in return for all the rights under the agreement. That it is for one of many rights is a matter which cannot be challenged now.
11. Therefore the only question that remains is whether the valuation of the cost of the three manuals at Rs. 25,000/- was proper. According to the assessee in any view of the matter it must be taken that the transfer of the technical knowhow is the most important of the rights that the assessee was entitled to under the agreement and its value must represent the major part of the consideration of Rs. 18.75 lakhs. We notice that the amount of Rs. 25,000/- has been determined without reference to facts and such determination is nothing but arbitrary. There is no support found in the order as to how this sum was so determined. Therefore to that extent we should accept the contention of both sides. The answer to the question should be in the negative. In this instance we cannot say we have answered either in favour of the revenue or in favour of the assessee. In regard to question No. 1 the answer is in the affirmative, that is against the revenue and in favour of the assessee.
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