Commissioner of Income Tax vs East India Industries (M) Pvt. Ltd.

Balasubrahmanyan, J.—These two references concern the assessment to Income Tax for the assessment year 1970-71 of an assessee, by

name East India Industries (Madras) Private Limited. The assessee carries on business in the manufacture of waterproof paper. This constitutes on

head of income. The assessee also owns house property, the annual letting value of which is rendered liable to Income Tax under another head.

There questions arose in the assessee''s assessment. Ultimately, the Tribunal resolved all the questions in favour of the assessee. At the instance of

the Commissioner, however, the Tribunal has referred the following questions of law :

Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of entire urban land tax paid during the

relevant previous accounting year in computing the income from the property bearing No. 215, T.H. Road, ir respective of the year or years to

which the payment relates ?

Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the deduction u/s 80-I of the Income Tax Act,

1961, and, consequently, to the allowance of the development rebate u/s 33(1)(b)(B) of the said Act ?

T.C. No. 758 of 1979 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to the higher rate of

development rebate u/s 33(1)(b)(B), especially when the necessary statutory reserve had not been created by the assessee for such a higher

allowance ?

It may be observed that the question in T.C. No. 758 of 1979 was referred by the Tribunal on a direction from this court under s. 256(2) of the

Act.

The answers to the questions referred to us do not raise difficulties. The first question in T.C. No. 298 of 1976 relates to a claim made by the

assessee for a deduction of amounts paid towards urban land tax in the computation of annual lettin value of the house property owned by the

assessee. The payments towards urban land tax included not only the tax for the accounting year concerned, but also arrears of urban land tax for

prior years. The ITO allowed the payment of urban land tax pertaining to the current year alone as an admissible deduction, disallowing the rest of

the claim. The Tribunal allowed the entire claim. The correctness of the Tribunal''s decision is now challenged in the first question.

The answer to this question is provided by a previous decision of this court in Commissioner of Income Tax Vs. M. Ct. Muthiah, . According to

that decision, any urban land tax paid during the relevant accounting year, no matter to which year it appertains, will have to come in as a proper

deduction in the computation of income from house property. Following that decision, we answer the first question in favour of the assessee and

against the Revenue.

As regards the second question of law, we have earlier observed that the assessee is engaged in the business of manufacturing waterproof

paper. The entire process of manufacture from pulp to paper is done by the assessee. The process undertaken by the assessee is not limited to,

first, obtaining ordinary paper from the market and then waterproofing that paper into a finished product. The assessee relied on the nature of its

manufacture and its end-product, and claimed that it was carrying on a priority industry industry within the meaning of Entry No. 16 in the Sixth

Schedule to the I.T. Act. As it stood at the material, time, the entry included ""paper"". Based again on the nature of the manufacturing process and

the product manufactured by the assessee in its factory, the assessee also claimed relief of an extra percentage of development rebate under s.

33(1)(b)(B) of the Act read with Entry 16 of the Fifth Schedule. It may be observed that Entry 16 of the Fifth Schedule is identical with Entry 16

of the Sixth Schedule. The entry refers to an industry engaged in the production of paper, among other things. Briefly stated, the claim of the

assessee for a higher development rebate as well as for relief as a priority industry depended on the answer to the question whether the assessee is

engaged in manufacturing paper. The ITO held that manufacturing waterproof paper will fall outside the scope of Entry 16 of the Fifth Schedule as

well as Entry 16 of the Sixth Schedule.

In appeal, the Tribunal disagreed with the view of the ITO. They held that the waterproof paper manufactured by the assessee in its factory must

be regarded as falling within the meaning of the expression ""paper"" in the relevant entries in the two Schedules. This finding of the Tribunal is the

subject-matter of reference under the second question of law we have earlier reproduced.

It is trite law that the entries in the Fifth Schedules to the I.T. Act have got to be understood from the point of view of trade usage, of not

common sense. In present case, it is not in dispute that the article manufactured by the assessee is waterproof paper which goes through all the

manufacturing processes in the assessee''s plant right from the basic raw materials used for purposes of manufacture of any paper. As we earlier

observed, the assessee is not purchasing or otherwise acquiring paper and by some process of lamination or otherwise converts in into waterproof

paper. Hence, the manufacture of this variety of paper must be regarded as coming within the relevant entries in the Fifth and Sixth Schedules. We,

accordingly, uphold the decision of the Tribunal and our answer to this question must, therefore, be in the affirmative.

This leaves the question referred in T.C. No. 758 of 1979. This question arises from the Tribunal''s appellate order only in a limited sense. The

matter does not seem to have been presented or argued by both sides before the Tribunal in all its aspects. The question arises this way : The

assessee claimed development rebate after creating a development rebate reserve, which is a condition precedent to the grant of the allowance.

Under the provisions of the Act, the reserve created must be not less than 75 per cent. of the rebate to be allowed in the given year. It would

appear that the quantum of reserve which the assessee had actually created, would be just sufficient to justify the grant of development rebate

under the normal percentage. The assessee, however, claimed before the authorities that it was entitled to a higher development rebate on the basis

that it was engaged in the manufacture of paper within the meaning of Entry 16 of the Fifth Schedule. The ITO had rejected this claim. Having

rejected the claim, there was no difficulty for the ITO granting the development rebate because, as we earlier observed, the reserve created by the

assessee was in accordance with the provisions of the act warranting the grant of development rebate under the normal percentage allowed under

the Act. The Tribunal, in appeal, however, upheld the assessee''s claim that is was entitled to the development rebate at a higher percentage. The

Tribunal rendered this decision without any reference to the size of the reserve which the assessee had created in its books in the relevant

accounting year. The Tribunal concentrated upon the question whether the assessee was entitled to development rebate at a higher percentage,

without at the same time directing its attention to the other aspect of the question, namely, the creation of the requisite reserve. It is this aspect

which has been highlighted in the question of law before us in T.C. No. 758 of 1979. The point of view urged by the Department in the question is

that without creating a proper reserve, which must be at least 75 per cent. of the development rebate to be granted, the assessee cannot claim any

relief whatsoever. The question would possibly lead to the contention that even the relief already granted by the ITO would be in danger of being

lost if, on examination, it is found that the assessee had not created sufficient reserve to cover at least 75 per cent. of the development rebate at the

higher rate allowable under the Act for the paper manufacturing industry.

Learned standing counsel for the Income Tax Department pointed out that Tribunal has not discussed these aspects of the question, but had

sent the matter back to the ITO without fully going into the repercussions of their decision on the main question whether the assessee is entitled to a

higher development rebate. The question whether and to what extent development rebate reserve has been created and whether even on the

reserve already created, any development rebate could be granted to the assessee at all, are questions which have got to be considered in the light

of the Tribunal''s conclusion that the assessee is entitled to the higher percentage of development rebate. Since all these questions have not been

considered, although they are vital to the decision in the case, we refrain from answering the question referred in T.C. No. 758 of 1979. This,

really, is only another way of saying that the Tribunal has got to take up the matter once again, giving it an exhaustive consideration from all aspects

relating to the grant of development rebate, creating of the reserve and the minimum relief which the assessee would get on any view of the size of

the reserve already created by the assessee.

The reference T.C. No. 758 of 1979 is, accordingly, disposed of.

In the circumstances, there will be no order as to costs.