TMI Blog1984 (8) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and the Revenue filed applications for reference before the Tribunal under section 256(1) of the Income-tax Act. On the said applications, the Tribunal has made the instant reference by which opinion of this court is sought on 19 questions mentioned in it. Questions Nos. 1 to 7 are at the instance of the Revenue and questions Nos. 8 to 19 are at the instance of the assessee. These questions are: " 1. Whether the Appellate Tribunal was justified in law in holding that depreciation should be allowed on the cost of digging and construction of a well in the factory premises of the assessee ? 2. Whether the Appellate Tribunal was justified in law in holding that in working out the amounts deductible in terms of rule 19A(3), borrowed monies and debts due must mean borrowed monies and debts due and payable? 3. Whether the Appellate Tribunal was justified in law in holding that in computing the total value of assets under rule 19A(2), the capital expenditure on scientific research which was already entirely allowed under section 35(2)(ia) should be included in the category of assets not entitled to depreciation? 4. Whether the Appellate Tribunal was justified in law in ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's industrial undertaking as till the assessment was completed, the said amount did not constitute debt due to the assessee ? 13. Whether the Tribunal ought to have held that the excess advance tax paid by the assessee was to be included in computing the capital employed in the assessee's industrial undertaking for the purposes Of rule 19A(2) of the Income-tax Rules, 1962 ? 14. Whether the Tribunal erred in holding that the unclaimed dividends of Rs. 8,701 and the refundable equity issue application moneys of Rs. 4,800 constituted liabilities of the assessee company which were deductible in arriving at the capital employed in the assessee's industrial undertaking ? 15. Whether the Tribunal ought to have held that the unclaimed dividends and the refundable equity issue application moneys have the character of capital employed in the undertaking in the same way as share capital and were hence includible in computing the capital employed in the assessee's industrial undertaking ? 16. Whether the Tribunal erred in holding that the assessee company was not entitled to any deduction under section 80J in respect of its Chemical Unit for the assessment year 1971-72 as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to deduction under section 80J, even though the assessee's case was that this loss of the Chemical Unit was fully absorbed by the profit of its other activities. The view of the Income-tax Officer has been affirmed by the first appellate authority and also by the Tribunal relying upon the decision of the Madras High Court in Rajapalayam Mills Ltd. v. CIT [1970] 78 ITR 677. The Income-tax Officer while calculating the deduction under section 80J, for the calendar year 1969, had restricted the relief to the proportionate period of the year after the production commenced, while the assessee had claimed relief for the entire year. The Tribunal has, however, accepted the contention of the assessee and calculated the relief for the entire accounting year, i.e., 1969. The assessee had raised a question of vires of rule 19A(3) before the authorities. While the Income-tax Officer and the first appellate authority held that they could not go into the question of vires, the Tribunal-expressing doubt about its jurisdiction-held that the said provision was not ultra vires section 80J. For the purpose of granting relief under section 80J on the basis of the capital employed, the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 Act with effect from April 1, 1968. Prior to it, section 84 of the Act contained a similar provision. In the earlier Act of 1922, section 15C was the corresponding provision. It is to be noticed that section 80J was amended in the year 1980 with retrospective effect from April 1, 1972. For the assessment years in this reference, we are not concerned with either the said amendment or the controversy about its retrospectivity. Rule 19A of the Rules has also undergone some amendments subsequently with which we are not concerned. Section 80J, among other things, provides that where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking (i.e., new unit), there shall, in accordance with and subject to the provisions of the section be allowed in computing the total income of the assessee, a deduction from such profits and gains of so much of the amount thereof as does not exceed the amount calculated at the rate of 6 per cent. per annum on the capital employed in the industrial undertaking computed in the prescribed manner in respect of the previous year relevant to the assessment year. Rule 19A of the Rules provides for the comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the Madras High Court in Rajapalayam Mills Ltd. v. CIT [1970] 78 ITR 677 (a case under section 15C of the 1922 Act) and came to the conclusion that the assessee was not entitled to the relief under section 80J in respect of the assessment year 1970-71 (sic) because the operation of the unit resulted in a loss. It did not agree with the contention of the assessee that the said loss of the new unit was fully absorbed by the profits made by the existing units of the assessee and, therefore, it is entitled to claim the benefit in this year. Subsequently, the Supreme Court has reversed the said decision of the Madras High Court by its judgment in Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777. The Supreme Court has taken the view that the assessee is the company and the loss or profit of the new unit cannot be isolated or quarantined for the purpose of the assessment under the Income-tax Act. The Supreme Court in another decision in CIT v. Patiala Flour Mills Co. P. Ltd. [1978] 115 ITR 640, a case under section 80J, has taken a similar view. These developments have also to be taken into consideration. Question No. 2.- This court by its judgment in Warney Hindustan Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in this case, four other High Courts have taken a similar view, viz., the Madras High Court in CIT v. Simpson Company [1980] 122 ITR 283, the Madhya Pradesh High Court in CIT v. Sanghi Beverages (Pvt.) Ltd. [1982] 134 ITR 623, the Gujarat High Court in CIT v. Sarabhai Sons Limited [1983] 143 ITR 473 and the Karnataka High Court in CIT v. Mysore Petro-Chemical Ltd. [1984] 145 ITR 416. The contention of the Revenue is not justified. The purpose is to give deduction at 6 per cent. per annum of the capital employed from the income for the setting up of a new unit. The number of days in a particular year when the unit was actually working is not relevant. There may be stoppage of work due to strike, lock-out or other reasons. A particular unit may have a longer gestation period and other units may start in a shorter period. Setting up of a new unit is normally not possible in a matter of days, weeks or even a few months. For the purpose of making preparations and for setting up of a new unit, capital will be employed up to the date of start of production. The starting point of the grant of relief is the year in which production commenced and the relief is available for the next ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed that for the purpose of calculating assets under rule 19A(2), full value of the debts owed to the assessee on the first day of the computation period had to be taken into account. The Income-tax Officer had accepted this contention. There was, therefore, no controversy about this before the first appellate authority. Before the Tribunal, the assessee was contesting the deduction of borrowed moneys, debts and liabilities due from the assessee from gross assets under rule 19A(3). The assessee's contention was two-fold : firstly, that rule 19A(3) was ultra vires ; and, secondly, deduction should be limited to the debts which had already become due and payable on the computation date and not to the entire borrowed moneys by the assessee. While dealing with the contention of the assessee, under rule 19A(3), the Tribunal held that rule 19A(3) was valid but held that for the purposes of effecting deduction under rule 19A(3), only the debts due and payable by the assessee on the computation date should be taken into account and not the total amount owed by the company. The Tribunal, therefore, drew a distinction between the debt due and debt owed for the purpose of rule 19A(3). In co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate authority about the computation of assets, viz., debts owed to the assessee, under rule 19A(2). Section 254 dealing with orders which the Appellate Tribunal can pass shows that there is no power given to the Tribunal to pass an order which has the effect of enhancing the tax liability over that which has been fixed by the Income-tax Officer. The learned counsel invites our attention, by way of comparison, to section 24(5) of the Wealth-tax Act which confers such specific power on the Tribunal in the case of appeals under the Wealth-tax Act. It is urged by him that, in the absence of such specific provision and the other provisions which show that the scheme of the Act does not contemplate interference with the order of the Income-tax Officer by the Tribunal, question No. 10 should be answered in favour of the assessee. On behalf of the Revenue, it is contended that such a power should be implied in the Tribunal particularly when it was applying the principle on the basis of the assessee's contention in respect of some other matter but in similar circumstances. We see force in the contention on behalf of the assessee, but it is not necessary to go into this larger questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable to the assessee and debt owed to the assessee as an asset for the purpose of rule 19A(2) will not make any difference as it will be counted as an asset under one sub-clause or the other. The considerations for determining debt due by the assessee as a liability for the purpose of rule 19A(3) will be different. The principle under the Wealth-tax Act also may not be of assistance. On the language of rule 19A(2), we hold that the amounts due to the assessee which became payable on the computation date or which are owed and are payable on any future date are assets of the assessee and are to be included in the capital employed for the purpose of grant of relief under section 80J. Question 11 is, therefore, answered in the affirmative and in favour of the assessee. Questions Nos. 12 and 13.-The assessee had claimed as assets and capital employed the amount representing the difference (between) advance tax already paid and the tax liability according to its books. The Income-tax Officer excluded this amount on the ground that till the assessment was completed, this could not be treated as a debt owed to the assessee, or an asset of the assessee. The appellate authority as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. They are not its assets. The assessee is a juristic person. Amounts lying with it belonging to other individuals who may be shareholders cannot be its funds. They are not even borrowings by the assessee. In such circumstances, the Tribunal was justified in not allowing the same to be included as an asset of the company. Hence, question No. 14 is answered in the affirmative and in favour of the assessee and question No. 15 is answered in the negative and against the assessee in the following manner: These amounts could not be deducted as liability because rule 19A(3) has been held to be ultra vires. At the same time, these amounts cannot be included as assets of the assessee or capital employed for the purpose of granting relief under section 80J. Questions Nos. 16 to 19.-For the accounting year relevant to the assessment year 1971-72 (sic), the new chemical unit of the assessee incurred a loss of Rs. 49,30,316. But, the assessee had made a profit in respect of its other operations and this profit had totally absorbed the loss of the chemical unit. The Income-tax Officer had held that, in view of the fact that the operations of the unit did not show any profit and resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held that the action of the Incometax Officer in treating the amounts of Rs. 36,112 and Rs. 81,460 for the assessment years 1970-71 and 1971-72 as perquisites and bringing them to tax is not justified. It held that except for the depreciation on furniture at the residence of the directors, the amounts were cash payments by the assessee and do not amount to perquisites. It held that the cash payments should not be included in the taxable income of the assessee. recent judgment of this court in CIT v. Warner Hindustan Ltd. [1984] 145 ITR 24, which is also a reference arising out of the assessment proceedings of the present assessee, has also taken a similar view. The Revenue has not made out any case for taking a different view. This question is answered in the affirmative and against the Revenue. Question No. 6.-The assessee had entered into an agreement with M/s. Warner Lambert Pharmaceutical Company, USA., on May 15, 1964. This agreement has been produced before the authorities and is a part of the record. This agreement refers to an earlier agreement dated May 12, 1964, viz., a collaboration agreement. The said collaboration agreement dated May 12, 1964, is not on record. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ications furnished by the American company will have to be returned to it. But there is no prohibition for the assessee continuing to use the plant already constructed or to use the same processes or to manufacture and sell the products. The rights or interests in the said agreement cannot be directly or indirectly assigned by the Indian company without the prior consent of the American company. The American company has granted licences, rights and privileges to the assessee in connection with the synthesis, manufacture and sale of the products under their chemical or generic names. The " products " have been given a wide definition and include the intermediates and derivatives. The assessee has been granted the right to use all information, know-how, processes and technical data relating to the products and the processes of manufacture, etc. It has also been given the right to obtain from the American company, the technical assistance relating to synthesis, manufacture and quality control of the products. This right also extends to any further data and information which may develop subsequent to the agreement. The assessee is also given the right to use the services of experienced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a revenue receipt in the hands of the person receiving it but its nature need not be the same, viz., capital expenditure or revenue expenditure, so far as the person making the payment is concerned. The Tribunal has drawn the following conclusions from the construction of the agreement between the American company and the assessee: (a) that the American company did not part with any assets in favour of the assessee ; (b) that the assessee has only obtained a licence for user of process and technical data in connection with the manufacture and sale of licensed products which was required to be returned upon the termination of the agreement. It has referred to the following similarities between the agreement in Ciba's case [1968] 69 ITR 692, decided by the Supreme Court and the agreement in this case: (i) Regarding fixed period-5 years in the Supreme Court case and 10 years in this case. (ii) The object to obtain benefit of technical assistance for running the business. (iii) The licence was granted to the assessee subject to the rights already granted or that may be granted in future to others. (iv) The assessee was expressly prohibited from divulging the confiden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no right to use any trade-name and the products are to be sold by their chemical or generic names. The range of products includes intermediates and derivatives. The Tribunal has also referred to Rolls-Royce Ltd. v. Jeffrey (Inspector of Taxes) [1965] 56 ITR 580 (HL), English Electric Company's case [1964] 41 TC 556 (HL) and CIT v. Hindustan General Electrical Corporation Ltd. [1971] 81 ITR 243 (Cal), for holding that the payment by the assessee in this case is not a capital expenditure but a revenue expenditure. In the two cases of the House of Lords, the question was whether a receipt, i.e. income, amounts to a capital receipt or a revenue receipt for the purpose of exigibility to tax under the English statute. As observed by our Supreme Court in Empire jute Co. Ltd. v. CIT [1980] 124 ITR 1, the same transaction may result in a capital receipt in the hands of the person receiving it, but it need not be a capital expenditure for the person incurring it. The question here is whether the expenditure is liable for deduction from income or not and whether income of the person who received it is exigible to tax. It is contended by Sri Suryanarayana Murthy, learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure. He has also placed reliance on an unreported judgment of this court in Coromandel Fertilisers Ltd. v. CIT-since reported in [1984] 148 ITR 546 for the proposition that in modern days of developing technology, know-how is liable to become obsolete in a short time and cannot be described as an acquisition of enduring benefit. According to him, technical know-how is not property and there is no question of its being transferred or acquired as an asset. Instead of spending money on research, which may sometimes be duplication, the assessee is justified in acquiring the knowledge obtained as a result of research and development from the other company on payment. The amount spent on scientific research in our country should have been given as a deduction from income for the purpose of levy of incometax. It will not be just if this expenditure, which is made for acquiring the knowledge obtained from the research and development in some other country, is not allowed as an expenditure eligible for deduction for the purposes of income-tax. The question whether the expenditure pursuant to the agreement for the relevant assessment years was a capital expenditure or a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regularly updated by the American company. The products in this case are chemicals to be manufactured and sold under generic names and not under any trade name. The products include intermediates and derivatives of the various chemicals covered by the agreement. Without any material, it cannot be said that the know-how in respect of these will become obsolete within a short period. It is also to be noticed that there is no prohibition for the continued use of the updated technology or process of manufacture or know-how, even after the termination of the agreement. It cannot be said that like the know-how for fertilisers in Coromandel Fertilisers' case [1984] 148 ITR 546, the know-how in this case will also become obsolete. The Coromandel Fertilisers' case to the extent of the technology becoming obsolete is, therefore, distinguishable on facts. The Full Bench of this court in Praga Tools Ltd. v. CIT [1980] 123 ITR 773 as well as of the Karnataka High Court in Mysore Kirloskar Ltd. v. CIT [1978] 114 ITR 443 [FB], of the Bombay High Court in Cooper Engineering Ltd. v. CIT [1982] 135 ITR 597 and of the Delhi High Court in Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 74 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing value like goodwill. Though the agreement may describe the payment as towards technical fees, it is not conclusive of the matter and the nature of the payment will have to be determined on the material on record. The Tribunal, therefore, was not justified in law in holding that the amount paid by the assessee for the two assessment years for technical know-how was revenue expenditure. Question No. 6 is answered in the negative and against the assessee. The answers to the questions referred are as follows Question No. 1 is answered in the affirmative and against the Revenue. Question No. 2 has become academic and need not be answered. Question No. 3 is answered in the affirmative and against the Revenue. Question No. 4 is answered in the affirmative and against the Revenue. Question No. 5 is answered in the affirmative and against the Revenue. Question No. 6 is answered in the negative and against the assessee. Question No. 7 is answered in the affirmative and against the Revenue. Question No. 8 is answered in the negative. Question No. 9 is answered in the affirmative and in favour of the assessee. Question No. 10 has become academic and need ..... X X X X Extracts X X X X X X X X Extracts X X X X
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