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Commissioner Of Income-Tax v. M.B Umbrella Industries.
Factual and Procedural Background
The assessee, engaged in the manufacture of umbrellas, debited Rs. 25,001 in its trading account as commission paid for the use of the "TANK" trade mark to M/s. M. B. Umbrella Factory, which originally manufactured umbrellas under this trade mark. An agreement allowed the assessee to use the trade mark for five years on payment of Rs. 25,001 per year. The Income Tax Officer (ITO) treated this payment as capital expenditure, viewing it as a sale of goodwill and an enduring benefit, and disallowed the deduction by adding the amount to the assessee’s income. On appeal, the Commissioner of Income-tax (Appeals) held that the assessee had only acquired a licence to use the trade mark, not ownership, and allowed the payment as revenue expenditure. The Department appealed, but the appellate order was upheld. Subsequently, the Income-tax Appellate Tribunal referred the question of whether the payment was revenue or capital expenditure to this court under Section 256(1) of the Income-tax Act, 1961.
Legal Issues Presented
- Whether the sum of Rs. 25,001 paid to M/s. M. B. Umbrella Factory for the exploitation of the trade mark was revenue expenditure or capital expenditure?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Ciba of India Ltd. [1968] 69 ITR 692 | The assessee is entitled only to a limited right to use patents and trade marks without acquiring any asset or enduring advantage; payments made under such agreements are revenue expenditure under Section 10(2)(xv) of the I.T. Act. | The court applied this principle to find that the assessee did not acquire ownership of the trade mark but only a licence to use it temporarily, making the payment revenue in nature. |
Court's Reasoning and Analysis
The court examined the facts and found that the assessee had not purchased the trade mark or goodwill but was granted a licence to use the "TANK" trade mark for five years on payment of a licence fee. This fee was determined by a formula in the agreement. The payment was characterized as royalty for use of the trade mark, not as a price for acquiring a capital asset. The court relied on the precedent set in CIT v. Ciba of India Ltd., which distinguished payments for limited use rights from acquisition of enduring assets. The Commissioner of Income-tax (Appeals) and the Tribunal had recorded these findings of fact, which the court found to be correct and not erroneous. Consequently, the payment was rightly held to be revenue expenditure.
Holding and Implications
Answer to the referred question: In the affirmative and against the Department, holding that the Rs. 25,001 payment was revenue expenditure.
The parties were directed to bear their own costs. The decision directly affects the parties by confirming the deductibility of the payment as revenue expenditure and does not establish any new precedent beyond the application of existing principles.
1. By this reference under Section 256(1) of the I.T. Act, 1961, the Income-tax Appellate Tribunal, Indore Bench, Indore (for short " the Tribunal "), has referred the following question of law for the opinion of this court:
" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 25,001 paid to M/s. M. B. Umbrella Factory for the exploitation of trade mark was a revenue expenditure ?"
2. The material facts giving rise to this reference as set out in the statement of the case are as follows: The assessee-6rm derived income from the business of manufacture of umbrellas. In the trading account the assessee debited a sum of Rs. 25,001 towards " TANK " trade mark commission paid to M/s. M. B. Umbrella Factory. Earlier M/s. M.B. Umbrella Factory was manufacturing umbrellas with this trade mark. The ITO found that an agreement was executed between the assessee and M/s. M. B. Umbrella Factory according to which the assessee was allowed to use the trade mark for a period of five years on payment of compensation at Rs. 25,001 per year. The ITO, after giving an opportunity to the assessee to explain why the expenditure should not be disallowed being of capital nature, held that it was a case of sale of goodwill and the benefit of the agreement was of enduring nature and, therefore, the expenditure in question was not of revenue nature but of capital nature. The ITO, therefore, added the sum of Rs. 25,001 towards the total income of the assessee. On appeal by the assessee the Commissioner of Income-tax (Appeals) held that the trade mark had not been sold by the old firm or purchased by the assessee and that this was a case where the assessee-firm acquired a licence to use the same on the formula laid down in the agreement for a limited period of time by payment of licence fee. According to the Commissioner the payment in question was in the nature of royalty on trade mark used by the assessee and the payment was not by way of price for the acquisition of the capital asset which continued to belong to M/s. M. B. Umbrella Factory. The Commissioner, therefore, allowed the appeal and held that the amount of Rs. 25,001 was deductible as revenue expenditure. On further appeal by the Department the order of the Commissioner of Income-tax (Appeals) was maintained and the appeal was dismissed. At the instance of the Department the Tribunal has referred to the aforesaid question of law for the opinion of this court.
3. In CIT v. Ciba of India Ltd. [1968] 69 ITR 692 the Supreme Court held that where the assessee did not under the agreement become entitled exclusively even for the period of the agreement to the patents and trade marks of the Swiss company and it had merely access to the technical knowledge and experience in the pharmaceutical field which the Swiss company commanded, and the assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products upon the technical knowledge of the Swiss company for a limited period by making the technical knowledge available, the Swiss company did not part with any asset of its business, nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its business and that the payment made by the assessee was allowable as revenue expenditure under Section 10(2)(xv) of the I.T. Act.
4. Now, in the present case also, it has been found as a fact that the assessee did not purchase the trade mark or goodwill from the old firm as contended by the learned counsel for the Department. It is found as a fact that the assessee was merely granted a licence to use the trade mark " TANK " for a period of five years on payment of licence fee determined on the basis of a formula laid down in the agreement. It has further been held that the payment made by the assessee to M/s. M. B. Umbrella Factory was in the nature of royalty on trade mark used by it or in other words the payment made by the assessee was not by way of price for the acquisition of a capital asset but merely in the nature of licence fee paid for the use of capital asset which belongs to some one else.
5. In view of this finding of fact recorded by the Commissioner (Appeals) and confirmed by the Tribunal it cannot be said that the Tribunal committed any error in holding that the payment made by the assessee of Rs. 25,001 was revenue expenditure and not capital expenditure as contended by the Department.
6. As a result of the discussion aforesaid our answer to the question referred to us is in the affirmative and against the Department. In the circumstances the parties shall bear their own costs of this reference.
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