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PETITIONER: COMMISSIONER OF INCOME TAX, BOMBAY

       Vs.

RESPONDENT: FINLAY MILLS LTD.

DATE OF JUDGMENT: 01/10/1951

BENCH: KANIA, HIRALAL J. (CJ) BENCH: KANIA, HIRALAL J. (CJ) MAHAJAN, MEHR CHAND AIYAR, N. CHANDRASEKHARA

CITATION:  1951 AIR  464            1952 SCR   11  CITATOR INFO :  F          1955 SC  89  (21)  RF         1973 SC 318  (12)

ACT:     Indian   Income-tax   Act  (XI  of   1922),   s.   10(2) (xv)--Expenditure   incurred  for  registration   of   trade mark--Whether business expenditure-Effect of registration.

HEADNOTE:     The  expenditure incurred by a company carrying  on  the manufacture and sale of textile goods in registering for the first  time its trade marks which were not in use  prior  to the 25th January, 12 1937,  is  revenue expenditure and  an  allowable  deduction under  Sec.  10 (2) (xv) of the Indian Income-tax  Act.  The fact  that a  trade mark after registration could  be  sepa- rately  assigned  and not as a part of the goodwill  of  the business  only, does not make the expenditure for  registra- tion  capital  expenditure.  It is only  an  additional  and incidental facility given to the owner of the trade mark; it adds nothing to the trade mark itself.    Judgment of the Bombay High Court affirmed.    Commissioner  of Income-tax, Bombay v. The Century  Spin- ning  and  Weaving  and Manufacturing Co.  Ltd.  ([1947]  15 I.T.R.  105) approved.  British Insulated and Helsby  Cables Ltd.  v. Atherton ([1926] A.C. 205), Southern v. Borax  Con- solidated  Ltd.  ([1942] 10 I.T.R. Supp.  1),  Henriksen  v. Grafton Hotel Ltd. ([1942] 2 K.B. 184) referred to.

JUDGMENT: CIVIL APPELATE  JURISDICTION:  Civil  Appeal No. 103 of 1950.      Appeal from a Judgment of the Bombay High Court (Chagla C.J. and Tendolkar J.) dated 25th March, 1949, in Income Tax Reference No. 31 of 1948.  M.   C.   Setalvad,   Attorney-General for   India  (G.  N. Joshi, with him) for the appellant.  R.J. Kolah, for the respondent.

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    1951.  Oct. 1. The Judgment of the Court was  delivered by      KANIA  C.J.--This is an appeal from a judgment  of  the High  Court at Bombay and it arises out of the  opinion  ex- pressed by the High Court in respect of a question submitted to  it  by the Income-tax Tribunal. The material  facts  are these. The respondent is a textile mills company carrying on the business of manufacturing and selling textile goods. For the  assessment  years 1943-44 and  ’1944-45,  covering  the accounting periods ending with the calendar years 1941, 1942 and 1943, the respondent claimed the expenditure incurred by it  in registering for the first time its trade marks  which were not in use prior to the 25th February, 1937, as revenue expenditure and an allowable deduction out of its income for the  said  periods, under section 10(2) (xv) of  the  Indian Income tax Act. Following the decision  of  the Bombay  High Court  in Commissioner of Income-tax, Bombay v. The  Century Spinning 13 and  Weaving  and Manufacturing Co.  Ltd.(1),  the  Tribunal allowed  the  claim of the assessee.  At the desire  of  the appellant, the Tribunal submitted the following question for the opinion of the High Court :-     "Whether,  on  the facts of the  case,  the  expenditure incurred  by  the assessee company in  registering  for  the first  time its trade marks which were not in use  prior  to the  25th  February,  1937, is revenue  expenditure  and  an allowable  deduction under section 10(2) (xv) of the  Indian Income-tax Act ?"     The  High  Court, following its  previous  decision  and finding  that the fact of the trade marks having  come  into use after the 25th of February, 1937, made no difference  in the  result, answered the question in the affirmative.   The Commissioner  of Income-tax, Bombay, has come on  appeal  to us.     It was argued on behalf of the appellant that the  ques- tion  whether  a certain disbursement was of  a  capital  or revenue nature, has to be decided according to the principle laid  down  in British Insulated and Helsby Cables  Ltd.  v. Atherton(2).  In that case the company which carried on  the business of manufacturers of insulated cables established  a pension fund for its clerical and technical salaried  staff. The fund was constituted by a trust deed which provided that members should contribute a percentage of their salaries  to the  fund and that the company should contribute  an  amount equal to half the contributions of the members; and  further that the company should contribute a sum of pound 31,784  to form  the  nucleus  of the fund and to  provide  the  amount necessary  in order that past years of service of  the  then existing staff should rank for pension. That sum was arrived at  by  an actuarial calculation on the basis that  the  sum would  ultimately be exhausted when the object for which  it was  paid  was attained. The House of Lords held  that  this payment  was  in the nature of capital expenditure  and  was therefore  not  an admissible deduction.   Although  in  the opinions expressed by the different members of the House  of Lords (1) [1917] 15 I.T.R. 105.             (2) [1926] A.C. 205. 14     the  line  of approach is not completely the  same,  the principle  stated by Lord Cave in his speech has  been  test distinguish capital expenditure from revenue expenditure. It was recognised that a sum of money expended, not of necessi- ty and with a view to a direct and immediate benefit to  the trade,  but  voluntarily and on the  grounds  of  commercial

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expediency, and in order indirectly to facilitate the carry- ing  on of business, may yet be expended wholly  and  exclu- sively  for the purposes of the trade.  The Lord  Chancellor observed that the question appeared to be a question of fact which was proper to be decided by the Commissioners upon the evidence  brought before them in each case.  The  test  that capital  expenditure  is a thing that is going to  be  spent once  and for all and income expenditure is a thing that  is going  to recur every year was considered an useful  element in arriving at the decision but was not certainly the  deci- sive  fact. The Lord Chancellor observed  as  follows:--"But when an expenditure is made, not only once and for all,  but with a view to bringing into existence an asset or an advan- tage  for  the enduring benefit of the trade, I  think  that there  is very good reason for treating such an  expenditure as properly attributable not to revenue but to capital."   In order to appreciate the true position here Correctly it is  next necessary to notice the relevant provisions of  the Indian  Trade Marks Act, 1940.  It may be noted that  before this  Act there was no Trade Marks Act in India but  it  was recognised  that an action lay for infringement of  a  trade mark  independently of an action for passing off goods.  The Act  opens  with the preamble "whereas it  is  expedient  to provide  for the registration and more effective  protection of  trade marks ......  "Section 2(1) of the Act  defines  a trade mark as meaning "a mark used or proposed to be used in relation to goods for the purpose of indicating or so as  to indicate  a  connection in the course of trade  between  the goods  and  some person having the right to  use  the  mark, whether  with or without any indication of the  identity  of that person." Section 14 permits the 15 proprietor  of  a trade mark to have the trade  mark  regis- tered.  The  Attorney-General, on behalf of  the  appellant, relied  on  sections  20, 21, 28 and 29 in  support  of  his contention.  He  argued  that before the  Trade  Marks  Act, although  the proprietor of a trade mark could  maintain  an action  for infringement of his trade mark and the cause  of action in such a case was quite different from the cause  of action  in  an action for passing off goods,  by  the  Trade Marks  Act the right of the owner of the trade mark  is  in- creased  by section 21, and it is made assignable  independ- ently of the goodwill under sections 28 and 29 of the  Trade Marks Act. The question thus resolves itself into whether by reason  of  these two incidents the case  falls  within  the principle  laid down by Lord Chancellor Cave,  as  mentioned above.    In  our  opinion, the contention urged on behalf  of  the appellant must fail.  It is not contended that by the  Trade Marks  Act a new asset has come into existence. It was  con- tended that an advantage of an enduring nature had come into existence.  It was argued that just as machinery may  attain a higher value by an implementation causing greater  produc- tive  capacity,  in the present case the  trade  mark  which existed before the Trade Marks Act acquired an advantage  of an enduring nature by reason of the Trade Marks Act and  the fees paid for registration thereunder were in the nature  of capital expenditure.  In our opinion, this analogy is falla- cious.   The machinery which acquires a  greater  productive capacity  by reason of its improvement by the  inclusion  of some new invention naturally becomes a new and altered asset by  that  process. So long as the machinery lasts,  the  im- provement  continues  to the advantage of the owner  of  the machinery. The replacement of a dilapidated roof. by a  more substantial  roof  stands on the same footing.   The  result

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however of the Trade Marks Act is only two-fold.  By  regis- tration, the owner is absolved from the obligation to  prove his  ownership  of the trade mark.  It is treated  as  prima facie proved on production of the registration  certificate. It thus merely saves him the trouble of leading evidence, in the event of a suit, in a court 16     of  law, to prove his title to the trade mark.   It  has been  said that registration is in the nature of  collateral security  furnishing  the  trader with a  cheaper  and  more direct  remedy against infringers,  Cancel the  registration and  he  has still his right enforceable at  common  law  to restrain the piracy of his trade mark. In our opinion, ’this is neither such an asset nor an advantage as to make payment for its registration a capital expenditure.  In this connec- tion it may be useful to notice that expenditure incurred by a  company in defending title to property is not  considered expense  of a capital nature.  In Southern (H. M.  Inspector of  Taxes)  v. Borax Consolidated Limited(1).  it  is  there stated that where a sum of money is laid out for the  acqui- sition  or  the improvement of a fixed capital asset  it  is attributable to capital, but if no alteration is made in the fixed  capital  asset by the payment, then  it  is  properly attributable  to  revenue, being in substance  a  matter  of maintenance, the maintenance of the capital structure or the capital asset of the company.  In our opinion, the advantage derived by the owner of the trade mark by registration falls within  this  class of expenditure.  The fact that  a  trade mark  after registration could be separately  assigned,  and not as a part of the goodwill of the business only, does not also make the expenditure for registration a capital expend- iture.  That is only an additional and  incidental  facility given to the owner of the trade mark. It adds nothing to the trade mark itself.      In the judgment of the High Court some emphasis is laid on  the fact that by reason of registration the duration  of the trade mark is only for seven years, and it does not thus possess  that permanency which is ordinarily required of  an expenditure to make it a capital expenditure and in order to prove  the existence of a benefit of an enduring  character. The learned Attorney-General contended that the view that as the  benefit of registration lasted for seven  years,  i.e., for a limited period, it prevented the expenses of registra- tion being treated as capital expenditure, is unsound (1) [1942] 10 I.T.R. Suppl. 1. 17 and for that contention he relied on Henriksen (Inspector of Taxes)  v. Grafton Hotel Ltd.(1).  In that case, tenants  of licensing  premises by agreement with the landlord  paid  by instalment  the monopoly value fixed by the  licensing  jus- tices  when  granting the licence under section  14  of  the Licensing  (Consolidation) Act, 1910.  These were sought  to be  deducted as revenue expenditure but were  disallowed  by the  Court. Lord Greene M.R. first considered that the  pay- ment fell into the same class as the payment of a premium on the  grant of a lease or the expenditure on improvements  to the  property  which justices may require to be  made  as  a condition of granting a licence. Having reached that conclu- sion  he  rejected the argument that the payment  not  being made in one lump sum but by instalments made a difference in the  character  of  the payment.   He  observed  as  follows :--"Whenever a licence is granted for a term, the payment is made  as on a purchase of a monopoly for that term.  When  a licence is granted for a subsequent term, the monopoly value must be paid in respect of that term and so on. The payments

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are recurrent if the licence is renewed, they are not  peri- odical  so  as to give them the quality  of  payments  which ought  to be debited to revenue account.  The thing that  is paid for is of a permanent quality although its  permanence, being conditioned by the length of the term, is  shortlived. A  payment of this character appears to me to fall into  the same  class  as the payment of a premium on the grant  of  a lease,  which is admittedly not deductible."  The  Attorney- General  relied on these observations to point out that  the permanence  of the advantage was thus not dependent  on  the number of years for which it was to enure for the benefit of the  proprietor  of the trade mark.  In our  opinion,  these observations  have to be read in the context in  which  they have been made. The learned Master of the Rolls was discuss- ing  only the question of payment being made by  instalments as not making any difference in the nature of the  (1) [1942] 2 K.B. 184.        3 18 expenditure.   It was first held by him that the payment  in question  was of a capital nature and of the same  character as  premium paid on the grant of a lease and  was  therefore necessarily of a capital nature. Having come to that conclu- sion,  he  only  rejected the contention  that  because  the premium  was paid in more instalments than one it  lost  its character a capital expenditure.  In our opinion, this is an entirely  different thing from stating that the fact of  the advantage being for a limited time altered the character  of the  payment in any way.  As observed by Viscount Cave  L.C. the  question  is  always  one  of  fact  depending  on  the circumstances of each case individually.     In our opinion, the decision of the High Court  reported in  Commissioner of Income-tax, Bombay v. The Century  Spin- ning  and Weaving and Manufacturing Co. Ltd.(1)  is  correct and in the present case also the contention of the appellant must fail.  The appeal therefore fails and is dismissed with costs. Appeal dismissed. Agent for the appellant: P.A. Mehta. Agent for the respondent: R.A. Govind. (1) [1947] 15 I.T.R. 105.