ALEMBIC CHEMICAL WORKS CO. LTD. vs. COMMISSIONER OF INCOME TAX, GUJARAT

CIVIL APPEAL No. 43/1975Supreme Court[1989] 2 S.C.R. 30231 March 1989Bench: 2 JudgesAuthor: R.S. PATHAK, M.N. VENKATACHALIAH ALEMBIC CHEMICAL WORKS CO. LID.18 pages
AI SummaryAllowed

What did the Supreme Court hold?

The Supreme Court allowed the appeal, holding that the financial outlay was for the better conduct and improvement of the existing business and therefore constituted revenue expenditure. The Court emphasized that no single criterion is determinative of whether an outlay is capital or revenue, and the 'once for all' payment test is inconclusive. The purpose, object, and effect of the outlay, considered in a common-sense way with business realities, are relevant. The Court noted that rapid advancements in science and technology warrant circumspection in classifying such outlays as capital. Limitations on the assessee's rights regarding the know-how suggested it pertained more to its use than exclusive acquisition. The Court found no material to support the Tribunal's finding of a 'completely new plant' and a 'new process and technical know-how' constituting a new venture. The supplementary question regarding the acquisition of a new plant was answered in the negative, against the revenue. The judgment under appeal was set aside.

What were the facts?

The assessee, Alembic Chemical Works Co. Ltd., engaged in penicillin manufacturing, entered into an agreement with a Japanese firm, Meiji, for technical know-how, sub-cultures, training, and advice to increase production. The assessee paid Rs. 2,39,625 to Meiji and claimed it as revenue expenditure for assessment year 1964-65. The Income Tax Officer and Appellate Assistant Commissioner disallowed the claim, deeming it a capital outlay for an enduring benefit. The Income Tax Appellate Tribunal dismissed the assessee's further appeal, holding the payment was a 'once for all' acquisition of a capital asset. The High Court affirmed this, answering a referred question in the negative. The assessee appealed to the Supreme Court, which directed the Tribunal to refer an additional question regarding the acquisition of a new plant.

What were the issues?

1. Whether the sum paid to Meiji was a revenue expenditure, considering the nature of the agreement and the expenditure. - Assessee's contention: The expenditure was for improving the existing business and increasing the yield in the existing plant, not for setting up a new plant or a new venture. The limitations on the use of know-how indicated it was for use, not acquisition. - Revenue's contention: The agreement involved a new venture based on new technology and know-how of unlimited duration, requiring a new plant for commercial exploration. 2. Whether a new plant was obtained or installed by the assessee consequent upon the agreement. - Assessee's contention: The agreement was only to increase the yield in the existing plant, not to obtain a new one. - Revenue's contention: A new plant was required for the new technology and know-how.

Which sections of the Income-tax Act were involved?

Section 37

AI-generated summary — verify with the full judgment below

Cited by 278 judgments on BharatTax

See all citing judgments →

Counted from the text of the judgments hosted here. Most recent first.

A ALEMBIC CHEMICAL WORKS CO. LID. v. COMMISSIONER OF INCOME TAX, GUJARAT MARCH 31, 1989 B [R.S. PATHAK, 0 AND M.N. VENKATACHALIAH, JJ.j Income Tax Act, 1961: Section 37-Tests to determine whether -~ Capital or Revenue Expenditure--' Once for all' and 'enduring benefit' tests-Not conclusive--Object and effect of the expenditure to be looked into--'Once for all payment' made by manufacturer to a foreign com- e pany for supply of technical know-how etc. for increasing production improvisation in the process and technology supplemental to existing . I business-No new venture--Whether the payment made is a revenue ~ expenditure qualifying for deduction.

The appellant-assessee, a company engaged in the manufacture D of penicillin, in order to increase its production, entered into'!" agree· ment with a Japanese firm (Meiji) for supply of sub-cultures of penicil· Jin producing strains, technical know-bow, training, written descrip· tion of the process on a pilot plant, design and specifications of the main equipment in such pilot plant, and to advise the assessee In the large· ~ scale manufacture of penicillin for a limited.period of two years. E As per the agreemen

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 37

All 4,334 judgments and leading authorities on Section 37 →

Recent GST High Court judgments

Search GST case law →