Tulzapurkar, J.
1. Two questions have been referred to us in this reference for our determination; the first one at the instance of the Commissioner of Income-tax on a direction issued by this court on his notice of motion under section 256(2) of the Income-tax Act, 1961, while the other at his instance by the Tribunal itself under section 256(1) of the Act. The two questions are as follows :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in permitting the respondent assessee-company to agitate before it for the first time, its contention to the effect that its income was assessable under the head 'business' thereby placing the appellant in a worse position than before
'(2) Whether the fees earned by the assessee under the agreement dated November 27, 1958, are liable to be assessed as business income under section 28 or as income from the sources under section 57 ?'
2. The short facts giving rise to these two questions may be stated : The question relates to the assessment year 1962-63, the relevant previous year being the calender year ending 31st December, 1961. The assessee, M/s. Gilbert & Barker .' (hereinafter referred to as 'Larsen') Gilbarco granted licence to Larsen to manufacture, sell and service in India for Larsen's business pumps of the type manufactured by it and sold by it for its own business purpose in U.S.A. and elsewhere. The agreement was to run for a period of two years in the first instance and subject to approval by the Government of India was automatically to be continued from year to year thereafter, unless terminated earlier by mutual agreement. The agreement was for the promotion of manufacture in India of all petrol pumps and according to clause (c) of the preamble to the agreement 'Gilbarco intended to continue its efforts and research work for the improvement and development of its said pumps and expects to apply for patent rights in India from to time on such further improvement and additional features of invention in pumps as it believes patentable'. It appears that Gilbarco had also registered the trade-marks of two of their pumps known as 'Gilbarco' and 'Gilcometer' in India since 1942, but under agreement Gilbarco licensed Larsen to manufacture, sell and service in India for Larsen's business pumps of the type manufactured by Gilbarco known as 'Gilbarco'. The material provisions of the agreement are to be found is clauses 2, 3, 4, 5, and 7, all of which have been set out seriatim by the Tribunal in the statement of case and, therefore, we do not think it necessary to set them out here again. Briefly stated, Gilbarco under clause 2 granted to Larsen exclusive licence to make, or have made for it and to sell and service in India pumps of its manufacture embodying inventions disclosed by any patent rights which may be acquired by Gilbarco and any other Indian patents which may be acquired by Gilbarco with the right to licence others and there was also further provision that though Gilbarco agreed in principles with Larsen that Larsen may export pumps produced under the agreement before Larsen could undertake any such export business, Larsen was to obtain Gilbarco's consent so that such business should not get in conflict with Gilbarco's licensing commitments to third parties in those other countries. Under clause 4 Gilbarco undertook to supply to Larsen all information, drawings and specifications necessary or desirable to procure the efficient manufacture of such pumps as also to supply from time to time new information, drawings, designs and specifications with regard to the pumps and with regard to any inventions, improvements and developments in relation thereto and under clause 5 Gilbarco undertook to furnish Larsen from time to time as a continuing service during the period of the agreement all technical advice and instructions reasonably required by Larsen to further the business in connection with the manufacture of Gilbarco pumps.
3. During the accounting period relevant assessment year 1962-63 the assessee received the sum of Rs. 88,039 from Larsen representing 5% of the sale price of pumps and parts in accordance with the agreement. This amount is described as 'fee' in the agreement but has been referred to as 'royalty' in the assessment proceedings; but the nature of payment being clear, nothing turns upon the particular word to describe the same. In its return for the aforesaid assessment year the assessee returned the income of Rs. 88,039 subject to certain expenses which were claimed as and by way of deductions in a letter dated 8th November, 1962. There were three items of expenses, viz., travelling expenses (U.S. Dollars 616), estimated cost of furnishing manufacturing, drawings, bills of material and tools drawings, etc., to licensee (U.S. Dollars 140) and research and development expenses attributable to licence (U.S. Dollars 9, 686). Thus, the total expenses claimed as a deduction amounted to U.S. Dollars 10, 442. We are not concerned in this reference with the first two items of expenses which have been allowed as and by way of deduction by the Tribunal but we are only concerned with the last item of expense in regard to research and development expenses attributable to licence, which came to U.S. Dollars 9,686, which in terms of Indian currency is Rs. 46,202. The Income-tax Officer took the view that the income earned by the assessee was taxable as an income from 'other sources' under section 57 of the 1961 Act and since under that section expenses could be allowed only if it were actually incurred for the purpose of making or earning of the income, he disallowed all the items of expenses that were claimed by the assessee. He held that the expenses of Rs. 49,808 incurred by the assessee was not for earning its income in India but for its business in the USA. The Income-tax Officer further held that the allocation of a portion of the expenses to the Indian income was purely on a notional basis. He also held that under the terms of the agreement with Larsen it was not obligatory on the part of the assessee to incur any expenditure for research or for modification of the patent.
4. Accordingly, the full sum of Rs. 88,039 was brought to tax. In the appeal which the assessee carried to the Appellate Assistant Commissioner he reversed the decision of the Income-tax Officer as he held that it was obligatory on the part of the assessee under the agreement with Larsen to incur the expenses claimed and that there was nothing notional either about the calculation or the claim based thereon. He, therefore, directed that the expenses should be allowed. The department preferred an appeal to the Income-tax Appellate Tribunal and principally with regard to the item of expense which related to research and development expense amounting to Rs. 46,202 it was contended that the same could not be allowed as the agreement between Gilbarco and Larsen was limited to the models of pumps to be manufactured by Larsen and it was not possible to envisage that the research carried on in the USA could yield any information which would be useful to Larsen during the duration of the agreement. It was also contended that since the income of the assessee was being brought to tax under the head 'Other sources' under section 57 of the Act, expenses not directly incurred for earning the income could not be allowed. On behalf of the assessee a new contention was urged that the income from the fees received by the assessee was assessable as 'business income' under section 28 and not as income from 'Other sources' under section 57 since the assessee could be said to be carrying on business in India through the agency of Larsen and it was in the course of this business that Gilbarco had to undertake research and continuously keep abreast of new developments and incorporate the fruits of such research in improved designs as otherwise Gilbarco's products would go out of the market and if the income was assessed under section 28 of the Act all the expenses claimed by the assessee would have to be allowed.
5. On behalf of the department an objection was raised to the assessee being permitted to raise a new point or a new contention that the income should assessed under the heading 'Business income' under section 28 and it was urged that such a new contention should not be allowed, especially as no cross-objections have been filed by the assessee against the Appellate Assistant Commissioner's order. The Tribunal permitted the assessee to raise this new contention principally on two grounds. In the first, it took the view that the cross-objections were really confined to only such points or aspects which have been decided by the lower authorities against the assessee and since the contention which was sought to be urged before the Tribunal had never been dealt with by the Appellate Assistant Commissioner the assessee could not file any cross-objections; moreover, the assessee had completely succeeded before the Appellate Assistant Commissioner even on the basis that the income was assessable under the heading 'Other sources'. Secondly, the Tribunal took the view that since no fresh investigation into the facts was necessary and since all the facts were on record it was left to the discretion of the Tribunal to allow investigation into the facts under rule 11 of the Appellate Tribunal Rules, 1963, and it thought fit to exercise that discretion in favour of the assessee. On merit the Tribunal took the view that so far as the first two items of expenses were concerned, these would have to be allowed even if the assessment was made under section 57 of the Act. But after considering the facts which were already on record and relying upon the decision of the House of Lords in Jeffrey v. Rolls Royce Ltd. reported in [1962] 40 TC 443; [1965] 56 ITR 580, the Tribunal held that the assessee was in fact carrying on business in India by exploiting technical know-how, patents and other assets through the agency of Larsen in India and as such the income returned by the assessee was the business income liable to tax under section 28 of the Act. After arriving at this conclusion the Tribunal considered the question as to whether the item of expenditure in connection with research and development expenses amounting to Rs. 46,202 could be allowed or not and it came to the conclusion that such expenses would be allowable. Accordingly, it dismissed the department's appeal. As stated above, the first question has been referred to us by the Tribunal as a result of direction issued by this court under section 256(2) of the 1961 Act, whereas the second question has been referred to us by the Tribunal on its own under section 256(1) of the Act.
6. So far as the first question is concerned, it is true that before the taxing authorities the assessee did not raise the contention that the income which it had returned for the concerned assessment year should be assessed as 'business income' under section 28 of the Act and the case was proceeded as if the income was assessable under heading 'Other sources' under section 57 of the Act. It must, however, be observed that before the Appellate Assistant Commissioner the assessee had fully succeeded in getting all the items of expenses allowed as allowable deductions even under section 57 of the Act and, therefore, there was no question of the assessee filing any cross-objections before the tribunal in the appeal that had been preferred by the department against the Appellate Assistant Commissioner's order.
7. Rule 11 of the Appellate Tribunal Rules, 1963, runs thus :
'11. Grounds which may be taken in appeal. - The appellant shall not, except by the leave of the Tribunal, urge or be heard in support of any grounds not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule :
Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.'
8. Strictly speaking rule 11 would not be applicable to the facts of the present case for the assessee was not the appellant before the Tribunal and it was the department which had preferred an appeal to the Tribunal against the Appellate Assistant Commissioner's order, and the question is as to whether the Tribunal was justified in permitting the assessee to sustain the Appellate Assistant Commissioner's final order on a new point which it sought to urge before the Tribunal and, therefore, the principle enunciated in rule 11 will apply when the respondent seeks to urge a new point for the purpose of supporting the lower court's order on some new point. The Tribunal would have the discretion to allow any party to the appeal, may be the appellant or the respondent, to raise a new point or a new contention provided two thing are satisfied. First, that for urging such a new point no new facts are required to be brought on record and the point is capable of being disposed of on the facts which are already on record and, secondly, an opportunity is given to the other side to meet that point that is being allowed to be raised for the first time in appeal. In the instant case, it cannot be disputed that all the facts that were required for determination of the point as to whether the income returned should be assessed under the heading 'Business income' or not were already on record before the Tribunal and no further investigation of any other facts was necessary and it was on the basis of facts which were already on record that the respondent wanted to canvass the point before the Tribunal that the income returned by it should be assessed under the heading 'Business income'. Secondly, the aspect whether a particular income returned by the assessee should be brought to tax under one or the other heading of income should not be regarded as such a new point as to make the other side taken by surprise, especially when all the facts necessary for that purpose are already on record and in the instant case the department was given full opportunity by the Tribunal to meet the contention that was being permitted to be raised by the respondent for the first time in appeal. In our view, therefore, there was no question of placing the appellant in a worse position, which seems to be the implication of the question as framed. The Tribunal, in our view, was justified in permitting the respondent to agitate before it its contention that its income was assessable under the heading 'Business income' and, accordingly, the first question is answered in the affirmative.
9. Turning to the second question, it may be stated that neither before the Tribunal nor before the taxing authorities was any contention raised on the aspect of the quantum of expenditure that should be allowed as and by way of deduction. The very frame of the question also rules out any such enquiry and all that we are concerned to decide is whether the fees that were earned by the assessee under the agreement dated November 27, 1958, were liable to be taxed as business income under section 28 or income from other sources under section 57 and if we come to the conclusion that the income returned is assessable as business income under section 28 of the Act, then obviously the entire item of expenditure referable to research and development expenses will have to be allowed as a deduction. We have already referred to the material provisions of the agreement dated November 27, 1958, which was entered into by Gilbarco with Larsen under which Gilbarco had granted a licence to Larsen to manufacture, sell and service in India, pumps of the type manufactured by Gilbarco for a period of five years in first instance and that, thereafter, subject to approval of the Government of India, the period was to continue from year to year thereafter unless terminated earlier by mutual agreement. The nature of technical know-how which was to be supplied by Gilbarco to Larsen and the terms and conditions on which the same was to be supplied have been clearly indicated in the agreement and it was under this agreement that the assessee received from Larsen the sum of Rs. 88,039 representing 5% of the sale price of pumps and parts subject to deduction which it claimed before the taxing authorities and the Tribunal. After having considered the relevant clauses of the agreement, it seems to us clear that intangible assets, viz., technical know-how, the right to use registered trade marks, etc., could not be said to have been parted with by Gilbarco to Larsen or sold by it outright to Larsen but merely a licence had been conferred by Gilbarco to Larsen to make use of the same and exploit the same for the purpose of manufacturing the pumps in India. There is also further provision that whatever improvements or developments in relation to pumps that would be made by Gilbarco hereafter the same was also to be supplied from time to time by Gilbarco to Larsen. That being the position, which emerges clearly from the material provisions contained in the agreement, it seems to us that the case is similar to an English case of Juffrey v. Rolls Royce Ltd. [1965] 56 ITR 580, which has been followed by this court in the case of Commissioner of Income-tax v. Cilag Ltd. : [1968]70ITR760(Bom) .
10. Since the principle enunciated in Jeffrey's case [1965] 56 ITR 580 has been reiterated and followed in Bombay decision in cilag Ltd.'s case : [1968]70ITR760(Bom) , it would be sufficient if we refer to the decision in that case. In the case of Cilag Ltd. : [1968]70ITR760(Bom) , the assessee was engaged in the manufacture and development of chemicals, medical, pharmaceutical, biological, bacteriological and related products and specialities. It had carried on extensive research work and was maintaining laboratories for a continuous research and further advancement and improvement. It had its trade all over the world including India. The vast experience, the extensive knowledge and the practical experience in the pharmaceutical field, which Cilag Ltd. had acquired, it was using in its trade. Finding that it would be more desirable and practicable in the circumstances which were existing to set up a machinery in India for the purpose of manufacturing its own products than to trade in India with goods brought in from Switzerland it entered into an agreement with Cilag Hind which was a 60% subsidiary of Cilag Ltd. under which Cilag Hind was to be the sole importer and distributor of the products of Cilag Ltd. In India. It was also to be provided by Cilag Ltd. with active substance necessary for the conditioning of the products of Cilag Ltd. in India. Apart from these two things, Cilag Ltd. was also to put at the disposal of Cilag Hind its know-how for the manufacture of the active substances and also of its product. Cilag Hind was to pay to Cilag, compensation, fee, royalty or payment in respect of any of the active substances hitherto or now manufactured or that may be manufactured thereafter by Cilag Hind in India with the assistance of such information, processes, formulae, scientific data and assistance equivalent to a net figure of 5% of the cost thereof, such cost to be computed on the basis of the cost of the raw materials at the site of the manufacture and the cost of production including manufacturing charges. This court took the view that the royalties received by the assessee were 'income from business' and the assessee was entitled to have them set off against loss of the assessee in business of the previous years carried forward under section 24(2). The principle that has been enunciated in this decision and which has been extracted from the reported judgment in Handley Page v. Butterworth [1935] 19 TC 328 appears at page 767 (See : [1968]70ITR760(Bom) ) of the report and the material observations run as follows :
'In our opinion, it cannot be said that the supply of know-how by a person, who is using the know-how in his business, to others on a licence basis, cannot be regarded as a method of carrying on his business. As has been pointed out by Romer L.J. in Handley Page v. Butterworth [1935] 19 TC 328, the patent of the patentee or the secret knowledge possessed by the assessee of the process are both capital assets and both these assets possessed by the possessors thereof are capable of being employed in business in either of two ways, viz., that the can himself exploit the patent or the secret knowledge or process in business for profit or can grant a licence to others to do so on payment of royalty. The profit, which he would derive by exercising the invention or process or the profit he derives from the royalty are profits and gains within the meaning of Schedule D, that is, profits from business. It is no doubt true that parting of the patent or process in favour of a third party may, in certain circumstances, amount to a disposal of a capital assets and not its employment in trade. If, for instance, the secret process is sold away or is surrendered by making it public to the world, the payment which he may receive on the sale of the process or for its disclosure to the world may be a payment received on a disposal of a capital assets and not income from business. What is required to be considered is whether, on the facts and the circumstances of a given case, the licence granted to make use of the patents or the secret information to another was in the nature of parting of an asset or only in the nature of employing it in trade. In the present case, in our opinion, the latter is the true position.'
11. The above observations make the positions quite clear that the principle that is required to be applied is to consider whether, on the facts and the circumstances of a given case, the licence granted to make use of the secret information to another is in the nature of parting of an asset or only in the nature of employing it in trade. Applying this principle to the case before us it seems to us quite clear that, having regard to various clauses that are to be found in the agreement dated November 27, 1958, it is clearly a case of not parting with capital asset or technical know-how or using a registered trade-mark but a case where a licence has been granted to employ this capital assets in trade.
12. That being the position, in our view, the Tribunal was right in coming to the conclusion that the income returned by the assessee are liable to be taxed under the heading 'Business income' under section 28 of the Act and, consequently, the expenses incurred in respect of research and development were liable to be allowed as a deduction. The second question is, therefore, answered thus : 'Fees earned by the assessee under the agreement dated November 27, 1958, are liable to be assessed as business income under section 28.'
13. Department will pay the costs of the reference to the assessee.