Commissioner of Income Tax vs Warner Hindustan Ltd.

Upendralal Waghray, J.—This is a reference u/s 256(1) of the income tax Act, 1961 (''the Act''). The assessee is a public limited company. Their accounting year is the calendar year. For the assessment years 1970-71 and 1971-72, the ITO had rejected certain pleas raised by the assessee and made the assessment orders, the assessee carried the matter in appeals to the AAC, who, by a single, consolidated order, partly allowed the two appeals. Against the said order, the assessee filed two appeals and the revenue also filed two appeals before the Tribunal. The said four appeals were disposed of by the Tribunal by a common order dated 24-3-1976, by which the Tribunal dismissed the appeals of the revenue and partly allowed the appeals preferred by the assessee. Both the assessee and the revenue filed applications for reference before the Tribunal u/s 256(1). 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. Question Nos. 1 to 7 are at the instance of the revenue and question Nos. 8 to 19 are at the instance of the assessee. These questions are : "1. Whether the Tribunal was justified in law in holding that the depreciation should be allowed on the cost of digging and construction of a well in the factory premises of the assessee?

Whether the 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 payable ?

Whether the 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 u/s 35(2)(ia), should be included in the category of assets not en titled to depreciation ?

Whether the Tribunal was justified in law in holding that in working out the relief u/s 80J, relief for the entire period of 12 months should be allowed, notwithstanding the fact that the chemical unit and the chewing gum unit worked only for a part of the year ?

Whether the Tribunal was justified in law in holding that the pre-paid expenses constituted assets for the purpose of calculating the capital under rule 19A ?

Whether the Tribunal was justified in law in holding that the technical fees paid to Warner Lambert Pharmaceutical Company of USA of Rs. 51,264 and Rs. 1,56,777 for the assessment years 1970-71 and 1971-72, respectively was revenue expenditure ?

Whether the Tribunal was justified in law in holding that excess of perquisites taxed by the income tax Officer, amounting to Rs. 36,112 and Rs. 81,460 for the assessment years 1970-71 and 1971-72 u/s 40(a)(v), was not so taxable ?

Whether the Tribunal was justified in holding that the capital employed in the new industrial undertakings of the assessee for the purposes of determining the deduction of allowance u/s 80J had to be computed on the basis of the gross value of the assets of the undertaking without making any deductions under rule 19A(3) of the income tax Rules, 1962?

Whether the Tribunal erred in holding that in determining the capital employed in the industrial undertakings of the assessee, deduction had to be made for liabilities as per rule 19A(3) of the income tax Rules, 1962 ?

Whether the Tribunal erred in permitting the revenue to raise the point that for the first time in determining the capital employed in the industrial undertakings of the assessee, only debts due and payable to the assessee as on the first day of the computation period had to be taken into account when the revenue had not filed any appeal or cross-objection on this point ?

Whether the Tribunal ought to have held that in determining the capital employed in the assessee''s industrial undertakings, the full value of the debts owed to the assessee had to be taken into account under rule 19A(2) and not only debts due and payable to the assessee as on the first day of the computation period ?

Whether the Tribunal erred in holding that the amount of tax recoverable as on the first day of the computation period was not to be included in the capital employed in the assessee''s industrial undertaking as till the assessment was completed, the said amount did not constitute a debt due to the assessee ?

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 ?

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 asses- see-company which were deductible in arriving at the capital employed in the assessee''s industrial undertaking ?

Whether the Tribunal ought to have held that the unclaimed dividends and the refund able 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 under takings ?

Whether the Tribunal erred in holding that the assessee-company was not entitled to any deduction u/s 80J in respect of its chemical unit for the assessment year 1971-72 as the loss of Rs. 49,30,316 computed by the income tax Officer in respect of the chemical unit for the assessment year 1970-71 exceeded the profit of Rs. 4,57,299, computed by the income tax Officer in respect of the working of the chemical unit for the assessment year 1971-72, even though the said loss of Rs. 49,30,316 had been absorbed by the other business profits of the assessee-company for the assessment year 1970-71 ?

Whether the Tribunal ought to have held that as the gross total income of the assessee- company for the assessment year 1971-72 included profits and gains derived from the chemical unit, which was admittedly a new industrial undertaking, the assessee was entitled to the deduction u/s 80J in respect of its chemical unit for the assessment year 1971-72 ?

Whether the Tribunal erred in holding that the decision of the Madras High Court in Rajapalayam Mills Ltd. Vs. Commissioner of Income Tax, laid down the correct law and that in any event, there was no change in the relevant law, as contained in section 15C of the Indian income tax Act, 1922, and section 80J of the income tax Act, 1961 ?

Whether the Tribunal ought to have held that as the loss of the chemical unit for the assessment year 1970-71 had already been absorbed by the assessee-company''s other profits for that year, the said loss had no relevance in determining the deduction u/s 80J in the case of the assessee-company for the assessment year 1971-72 ?"

The assessee, who was having an existing business of manufacture and sale of pharmaceuticals (which was started in about 1965), had set up two new manufacturing units, viz., a chemical unit, which commenced production on 20-3-1969, and a chewing gum unit, which commenced production on 7-7-1969. The assessee had claimed relief u/s 80J of the Act for the two accounting years 1969 and 1970 relevant for the two assessment years, regarding which this reference is made. The working of the chemical unit, which commenced production from 20-3-1969, resulted in a loss of Rs. 49,30,316 for the assessment year 1970-71. For the assessment year 1971-72, it earned a profit of Rs. 4,96,426 (Rs. 4,57,299) before setting off of carry forward loss of the year 1970-71. Since the cumulative result of the two years'' work was a loss of over Rs. 45 lakhs, the ITO held that there was no income entitled to deduction u/s 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 ITO 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. Vs. Commissioner of Income Tax, The ITO, while calculating deduction u/s 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) of the income tax Rules, 1962 (''the Rules''), before the authorities. While the ITO 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 of section 80J. For the purpose of granting relief u/s 80J on the basis of the capital employed, the Tribunal had, with reference to rule 19A(3), for deducting liabilities mentioned therein, made a distinction between ''debt due and payable'' and ''debt owed'' by the company. It also applied the principle for debts owed to the company and debts due and payable to the company for the purpose of determining assets under rule 19A(2). The ITO had not treated capital expenditure on scientific research as an asset for the purpose of rule 19A(2) on the ground that a deduction from income liable to tax was already allowed u/s 35(2)(ia) of the Act. The Tribunal had, however, agreed with the contention of the assessee and included the said sum as an asset for calculating capital employed. The ITO had disallowed certain pre-paid expenses, which were not liable to tax in the relevant year from the calculation of assets for the purposes of rule 19A(2). The Tribunal had, however, accepted the assessee''s contention and held that these were assets within the meaning of rule 19A(2). The ITO had disallowed the claim of the assessee that the excess amount payable towards advance tax, according to its books, should be included as an asset. This view has been affirmed by the Tribunal. The ITO had deducted as liabilities under rule 19A(3), the amounts lying with the company towards unclaimed dividends and application money for the issue of equity shares. The Tribunal had affirmed the view of the ITO. The ITO had also not allowed the claim of the assessee for depreciation of the cost of digging a well. The Tribunal had, however, accepted the claim of the assessee. The ITO had held that a sum of Rs. 81,260, for the assessment year 1971-72, ought to be included in the taxable income of the assessee, as they represent excess perquisites paid by it. The Tribunal had, however, held that these were cash payments and the assessee was not liable to be taxed for them. 2. Question Nos. 2 to 5 and 8 to 19 relate to the grant of relief u/s 80J, read with rule 19A. Question Nos. 1 and 7 deal with some minor disputes. Question No. 6 deals with the controversy about the technical fees paid to Warner Lambert Pharmaceutical Company, USA, being a capital expenditure or a revenue expenditure.

Questions involving section 80J and rule 19A :

Section 80J has been introduced in the Act with effect from 1-4-1968. Prior to it, section 84 of the Act contained a similar pro vision. In the Indian income tax Act, 1922 (''the 1922 Act''), section 15C was the corresponding provision. It is to be noticed that section 80J was amended in the year 1980, with retrospective effect from 1-4-1972. For the assessment years in this reference, we are not concerned with either the said amendment or the controversy about its retrospectivity. Rule 19A 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 this 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 six per cent per annum on capital employed in the industrial undertaking computed in the prescribed manner in respect of the previous year relevant to the assessment year, rule 19A provides for computation of capital employed in an industrial undertaking for the purpose of section 80J of the Act. According to sub-rule (2) of rule 19A, aggregate of the amounts representing the value of the assets as on the first day of the computation period, of the undertaking shall be ascertained.

It reads as follows :

"The aggregate of the amounts representing the values of the assets as on the first day of the computation period, of the undertaking or of the business of the hotel to which the said section 80J applies shall first be ascertained in the following manner:

(i) in the case of assets entitled to depreciation, their written down value;

(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee;

(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business;

(iv) in the case of assets being debts due to the person carrying on the business, the nominal amount of these debts;

(v) in the case of assets being cash in hand or bank, the amount thereof."

Sub-rule (3) of the said rule provides that from the aggregate of the amounts as ascertained under sub-rule (2) shall be deducted the aggregate of the amounts, as on the first day of the computation period.

The object of the provision is to encourage setting up of new industrial undertakings or even new units in an existing industrial under takings by giving deduction from the income liable to tax of an amount calculated at 6 per cent per annum on the capital employed during the relevant year.

After the judgment of the Tribunal in this case, this Court by its decision reported in Warner Hindustan Ltd. and Another Vs. Income Tax Officer and Others, , i.e., in a batch of writ petitions, including one on behalf of the present assessees, declared that the provisions of rule 19A(3), insofar as it directs deduction of borrowed moneys and debts due by the assessee from the capital employed is ultra vires of section 80J. It appears that several other High Courts have also taken a similar view. This has led to the amendment of section 80J by incorporating section 80J(1A), with retrospective effect from 1-4-1972. We are, however, not concerned with the amended section 80J in this case.

The Tribunal, in its judgment, had relied upon the decision of the Madras High Court reported in Rajapalayam Mills Ltd.''s case (supra)(a case u/s 15C of the 1922 Act), and came to the conclusion that the assessee was not entitled to the relief u/s 80J in respect of the assessment year 1970-71 because the operations of the new 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 benefits in this year. Subsequently, the Supreme Court has reversed the said decision of the Madras High Court by its judgment reported in Rajapalayam Mills Ltd. Vs. The Commissioner of Income Tax, Madras, . 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 Act. The Supreme Court in another decision reported in CIT v. Patiala Flour Mills Co. (P.) Ltd. [1978] 115 ITR 640, a case u/s 80J, has taken a similar view. These developments have also to be taken into consideration.

Question No. 2 : This Court, by its judgment in Warner Hindustan Ltd.''s case (supra), held that rule 19A(3) is ultra vires of section 80J. In view of this, the deduction of the borrowed moneys and debts due, which can be done only under rule 19A(3), is not permissible for calculating capital employed. The question whether it was a debt owed or debt due and payable, is not of any consequence as in either situation it cannot be deducted. This question has become academic and need not be answered.

Question No. 3 : The Tribunal had included the capital expenditure on scientific research as an asset for the purpose of calculating capital employed for granting relief u/s 80J. It is contended on behalf of the revenue that because deduction from taxable income is allowed u/s 35 in respect of expenditure of a capital nature on scientific research, the Tribunal was not justified in calculating the said amount again as an asset for the purpose of section 80J. The grant of relief u/s 80J (which is only for a limited period) is based on the amount of capital employed, which is to be calculated according to rule 19A. The fact that deduction is given for the purpose of computing taxable income u/s 35 for expenditure on scientific research, does not mean that it ceases to be capital employed or an asset. It is an asset not entitled for depreciation and the Tribunal was justified in taking it into account for grant of relief. Hence, question No. 3 is answered in the affirmative and against the revenue.

Question No. 4: The two newly set up units of the assessee went into production during the accounting year 1969. The assessee had claimed benefit u/s 80J at six per cent per annum of the capital employed for the entire year. The ITO, however, circumscribed this relief for the proportionate period after the plant of each unit went into production. In the ITO''s view, because section 80J speaks of relief at six per cent per annum of the capital employed, it has nexus to the entire year. The Tribunal has, in its judgment, held in favour of the assessee and granted relief for the entire accounting year, viz., the calendar year 1969. It took the view that the expression ''six per cent per annum'' provides only rate of calculation and does not contemplate a restriction of the relief on a pro rata basis for a part of the year. After the judgment of the Tribunal in this case, four other High Courts have taken a similar view, viz., the Madras High Court in Commissioner of Income Tax, Tamil Nadu-I Vs. Simpson and Company, the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Sanghi Beverages (Pvt.) Ltd., , the Gujarat High Court in Commissioner of Income Tax, Gujarat-I Vs. Sarabhai Sons Ltd., and the Karnataka High Court in Commissioner of Income Tax, Karnataka-II Vs. Mysore Petro-chemical Ltd.,

The contention of the revenue is not justified. The purpose is to give deduction at six per cent per annum of the capital employed from the income for 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, lockout 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 next four years. The Tribunal was right in holding that the assessee is entitled to the benefit for the entire year. This question is answered in the affirmative and against the revenue.

Question No. 5 : The Tribunal has held that the assessee is entitled to include certain pre-paid expenses as an asset for the purpose of calculating capital employed u/s 80J. Similar view was taken by the AAC. It was found that these amounts represented advance payments, which were not due in the relevant year as an asset of the assessee and a part of the capital employed. The contention of the revenue that these ought not to have been included for the grant of relief u/s 80J, is based on the submission that they do not come under any of the categories of the assets mentioned in rule 19A(2). The larger question whether an amount which is capital employed but does not come in any of the heads of assets under rule 19A(2) is to be taken into consideration for the grant of relief u/s 80J, need not be gone into in this case because it has been found by the authorities below that the pre-paid expenses in this case fall in the category of assets acquired by purchase and not entitled to depreciation under rule 19A(2). We think, the Tribunal was justified in holding that these amounts ought to be included for the grant of relief u/s 80J. This question is, therefore, answered in the affirmative, in favour of the assessee and against the revenue.

Question Nos. 8 and 9 : The Tribunal had held that for purpose of calculation of capital employed, deduction is to be made as contemplated by rule 19A(3) from the gross assets. It observed that the Tribunal could not go into the question of vires of rule 19A(3) but also held that the rule was not ultra vires. A Bench of this Court in a writ petition filed by the present assessee and others reported in Warner Hindustan Ltd.''s case (supra) has held that rule 19A(3) is ultra vires of section 80J. No case has been made out by the revenue to differ from the said view of the Bench. Hence, deduction of any liability or borrowings from the gross assets, as contemplated by rule 19A(3), is not permissible. Question No. 8 is answered in the negative and question No. 9 is answered in the affirmative and in favour of the assessee.

Question Nos. 10 and 11 : The assessee has claimed 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 ITO 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 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 the debt owed for the purpose of rule 19A(3). In connection with the said determination regarding rule 19A(3), both the revenue and the assessee have come up in reference, and question Nos. 2, 8 and 9 deal with the said aspect. As rule 19A(3) itself has been held to be ultra vires and there is no warrant for deduction of liabilities applying rule 19A(3), the said questions have been answered in favour of the assessee. The further controversy about debt due and payable and debt owed by the assessee for the purposes of rule 19A(3) is academic and not necessary.

As the Tribunal had drawn a distinction between debt due and payable and debt owed in connection with the amounts due from the assessee under rule 19A(3) at the representation of the departmental representative, it felt that the same principle should be applied for computation of the debt due and payable and debt owed to the assessee for determining the assets under rule 19A(2). This controversy was neither raised before the first appellate authority nor was there any appeal before the Tribunal by the revenue about this. The assessee, therefore, is questioning the jurisdiction of the Tribunal to allow the departmental representative to raise this question during the hearing inspired by the view of the Tribunal, while interpreting rule 19A(3). Question No. 10 relates to the power of the Tribunal to direct a recalculation of assets by the ITO (which will increase the assessee''s tax liability) in connection with an aspect which has become final, and question No. 11 deals with merits of the controversy about debt due and debt owed with reference to rule 19A(2).

Shri Dastoor, the learned counsel for the assessee, has contended that the Tribunal is a statutory authority and its powers are circum scribed by sections 253 and 254 of the Act. According to the scheme of the Act, the assessment order made by the ITO is final and subject only to revisional power of the Com missioner u/s 263 or reopening of the assessment by the ITO u/s 147. The appellate power is only a creature of statute and section 246 of the Act providing for appealable orders, does not contemplate appeals by the revenue. Similarly, section 253, which provides for appeal to the Tribunal, contemplates appeals only against order of the first appellate authority. In this case, admittedly, there was no controversy before the first appellate authority about the computation of assets, viz., debts owed to the assessee under rule 19A(2). Section 254, dealing with orders which the 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 from that which has been fixed by the ITO. The learned counsel invites our attention, by way of comparison, to section 24(5) of the Wealth-tax Act, 1957 (''the 1957 Act''), which confers such a specific power on the Tribunal in the case of appeals under the 1957 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 1961 Act does not contemplate interference with order of the ITO 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 question in this case because of the view we are taking on the merits of the controversy which is the subject matter of question No. 11. Question No. 10 becomes academic for this case and need not be answered.

As noticed while dealing with question No. 10, the ITO had accepted the full value of the debts owed to the assessee as assets under rule 19A(2) and did not confine them to the debts due and payable to the assessee as on the first day of the computation period. There was no controversy about this before the first appellate authority but the Tribunal in paragraph 5 of its judgment has directed the ITO to compute only debts due and payable to the assessee as on the first day of the computation period alone as assets. It is contended by the learned counsel for the assessee that for computing capital employed, rule 19A(2)(m) and (iv) covers all the debts owed to the assessee. While sub-clause (iv) speaks of debt due, sub-clause (iii) speaks of assets acquired otherwise than by purchase and not entitled to depreciation. According to him, rule 19A(2) practically covers all types of assets of the assessee and the two sub-clauses clearly show that both debts due as well as debts owed (and not yet due for repayment to the assessee) are treated as assets. He, therefore, submits that the controversy about the debt due and debt owed which arises under rule 19A(3) for ascertaining the liabilities of the assessee may not be germane for determining assets under rule 19A(2). Alternatively, he has relied upon a decision of a Division Bench of this Court in a reference under the Act relating to the present assessee, viz., Commissioner of Income Tax Vs. Warner Hindustan Ltd., . In that case, the controversy was about debt due and debt owed by the assessee for the purpose of ascertaining liabilities under rule 19A(3). Relying upon the judgment of the Supreme Court, under the 1957 Act, reported in K.S. Venkataraman and Co. Vs. State of Madras, the Bench held that, for the purpose of the said provision, debt due takes in debt owed as it is also an amount which was due by the assessee. It is not necessary for the purpose of this case to go into the distinction between ''debt due'' and ''debt owed'' which may be relevant for ascertaining the liabilities under rule 19A(3). As already pointed out, difference in the debt due and payable 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 1957 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 u/s 80J. Question No. 11 is, therefore, answered in the affirmative and in favour of the assessee.

Question Nos. 12 and 13 : The assessee had claimed as assets and capital employed, the amount representing the difference (surplus) in advance tax already paid and the tax liability according to its books. The ITO 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 the Tribunal have also taken the same view. It is contended on behalf of the assessee that payments of advance tax are made pursuant to the estimate made in accordance with the books of the assessee. At the end of the accounting year, when the balance sheet is prepared, according to the books of the assessee, it is discovered that payments made towards the advance tax are in excess of the tax liability. According to the books, the assessee is entitled to treat the difference, to which it is entitled by way of refund as an asset. The authorities below have held that the right to refund will arise only after the assessment is made and till then it cannot be treated as an asset of the assessee. Payment of advance tax is a statutory liability and may be, in accordance with the books of the assessee, it is to result in a refund. But till such time the assessment is completed and an order of refund is made, the assessee cannot treat the payment which has been made under a statutory obligation as its asset. Admittedly, the assessee cannot ask for refund of the said amount till the assessment is made, whether provisional or final. In such circumstances, the view taken by the Tribunal is correct. The said amount can neither be said to be a debt due to the assessee nor an asset of the assessee. Question Nos. 12 and 13 are answered in the negative and against the assessee.

Question Nos. 14 and 15 : The assessee has urged that unclaimed dividend of Rs. 8,701 and equity application money of Rs. 4,800, which were liable to be refunded, shall be treated as capital employed being in the nature of a share capital of the assessee or shareholders'' funds. On the other hand, the income tax authorities have deducted these amounts as liabilities of the assessee. In view of the fact that rule 19A(3) has been held to be ultra vires in Warner Hindustan Ltd.''s case (supra), it is not permissible to deduct the said amounts as liabilities. But, at the same time, we do not see how these amounts can be treated as capital employed or assets of the assessee. They are amounts which the persons entitled, i.e., shareholders or applicants for equity capital, can draw out any time. They were more in the nature of deposits or amounts lying in trust with the assessee. There is a statutory obligation on the assessee to pay these amounts. They cannot be treated as share capital of the 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 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 u/s 80J.

Question Nos. 16 to 19 : For the accounting year relevant to the assessment year 1970-71, 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 ITO had held that, in view of the fact that the operations of the unit did not show any profit and resulted in loss, there was no question of giving benefit u/s 80J for that year. He, thus, treated the new unit as a separate entity. His action was upheld by the first appellate authority as well as by the Tribunal. The Tribunal had relied upon the decision of the Madras High Court in Rajapalayam Mills Ltd.''s case (supra) for this view. As already noticed above, the said decision of the Madras High Court has been reversed by the Supreme Court in Rajapalayam Mills Ltd.''s case (supra). One other decision of the Supreme Court u/s 80J, reported in Patiala Flour Mills Co. (P.) Ltd.''s case (supra) takes a similar view. The assessee for the income tax purposes, is the company. According to the provisions of the Act, the assessee may have different heads of sources of income. There is no warrant for treating a new unit as a separate entity or quarantine the income of the said unit for the purpose of assessment. The order of the Tribunal confirming the action of the income tax authorities is not correct. The benefits the assessee is entitled to in respect of the chemical unit u/s 80J should be given while computing the income of the assessee, even though the operations of the new unit had resulted in a loss, as the said loss has been absorbed in the profits made by the other operations of the assessee. Question Nos. 16 to 19 are answered in the affirmative and in favour of the assessee.

Other questions :

Question No. 1 : The Tribunal has allowed the depreciation claimed by the assessee on the cost of digging and construction of a well within the factory premises. The Tribunal has referred to its decision in appeals relating to the earlier assessment years of the assessee and relying upon them held that depreciation has to be allowed. After the judgment was rendered by the Tribunal in this case, a Bench of this Court in two decisions, viz., in the reference arising out of the present assessee''s cases, reported in Commissioner of Income Tax Vs. Warner Hindustan Ltd., nd Warner Hindustan Ltd.''s case (supra), has held that the assessee is entitled to depreciation for the cost of digging and construction of the well. Nothing has been urged on behalf of the revenue to take a different view on this aspect. Question No. 1 is, therefore, answered in the affirmative and against the revenue.

Question No. 7 : The Tribunal has held that the action of the ITO 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 for 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 tax able income of the assessee. A recent judgment of this Court reported in Commissioner of Income Tax Vs. Warner Hindustan Ltd., 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 answer ed in the affirmative and against the revenue.

Question No. 6 : The assessee had entered into an agreement with Warner Lambert Pharmaceuticals Company, USA, on 15-5-1964. This agreement has been produced before the authorities and is a part of the record. This agreement refers to an earlier agreement dated 12-5-1964, viz., a collaboration agreement. The said collaboration agreement dated 12-5-1964 is not on record. The agreement dated 15-5-1964 provides, among other things, for technical assistance to be given by the American company to the assessee and certain amounts to be paid by the assessee to the American company. A sum of Rs. 51,264 was paid by the assessee in terms of this agreement during the accounting year relevant for the assessment year 1970-71 and Rs. 1,56,777 was paid in the accounting year relevant for the assessment year 1971-72. The assessee claims this to be a payment towards technical fees and revenue expenditure. The ITO had, however, held that this was in the nature of a capital expenditure and disallowed it as a revenue expenditure. On the assessee''s appeal, the AAC held that 80 per cent of these amounts should be treated as capital expenditure and 20 per cent as revenue expenditure. Both the revenue and the assessee had attacked the said conclusion before the Tribunal. The Tribunal has held the said payment to be a revenue expenditure. This question is, therefore, referred at the instance of the revenue contending that the Tribunal was wrong in coming to the conclusion that this was revenue expenditure.

The AAC and the Tribunal have referred, in extenso, to the terms of the agreement dated 15-5-1964 and also to the various cases where the question whether an expenditure is to be treated as capital expenditure or revenue expenditure has been considered.

The Tribunal has decided the question on the construction of the agreement dated 15-5-1964. It has not referred to or relied upon any other evidence. This agreement is apparently consequent to the collaboration agreement and was entered into prior to the assessee had set up its plant or started its activities. The American company has more than 40 per cent share in the equity capital of the assessee. The collaboration agreement or its terms are not available on record. The schedules of this agreement are also not available. The agreement is for a period of 10 years and it contains a renewal clause. The American company has a right to terminate this agreement in certain circumstances like the collaboration agreement ceasing to be operative or the shareholding of the American company being reduced to less than 40 per cent. On the termination of the agreement all the data, information, know-how, drawings, lay-outs, plans and specifications 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 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 inter mediates and derivatives. The assessee has been granted 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 technical personnel of the American company (of course the personnel have to be remunerated for their services by the assessee). The assessee is also given the right to use the facilities of the American company or its associates outside India for the purpose of training its personnel. The American company is to prepare and furnish a list of the recommended machinery and equipment and also plans, drawings and layouts relating to the installation of the machinery and equipment. The American company has also to review and evaluate any plans prepared by the Indian company. Part IV of the agreement provides payment to the American company at two and a half per cent of the net sales of the products of the Indian company. The question is, whether this payment is an expenditure which can be deducted from the income for the purpose of computing the profits of the assessee. The relevant provision of the Act, are those relating to computation of profits from business. Section 37(1) reads as follows :

"Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ''Profits and gains of business or profession''."

The corresponding provision in the 1922 Act was section 10(2)(xv). The issue in this case is whether this payment is an expenditure laid out or expended wholly or exclusively for the purpose of business and not in the nature of a capital expenditure, i.e., whether it is a revenue expenditure or a capital expenditure. If it is a capital expenditure, it cannot be deducted for computation of profits. The question whether a particular expenditure is a capital expenditure or revenue expenditure is not free from difficulty. It has to be decided on the basis of the facts and circumstances of each case. The phrase ''capital expenditure'' has not been defined in the Act and sound accountancy principles also have to be kept in view for deciding this controversy. Some tests have been laid down in cases but ultimately the answer will depend upon the facts and circumstances of each case. It has also to be kept in mind that a payment may result in a capital receipt or a revenue receipt in the hands of the person receiving it but its nature need not be 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 American company did not part with any assets in favour of the assessee.

(b) 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 the Commissioner of Income Tax, Bombay Vs. Ciba of India Ltd., 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 confidential information to third parties.

(v) There was no transfer of the fruits of research once for all.

(vi) There is a stipulated recurrent payment dependent upon sales.

Out of the two conclusions drawn by the Tribunal from the construction of the agreement in this case, conclusion No. (ii) does not appear to be justified in view of the several clauses of the agreement. At the termination of the agreement the assessee is required only to return back the technical data, plans and drawings, etc., provided by the American company, but there is no clause prohibiting the company from continuing to manufacture the products or using the machinery or the manufacturing processes. Of the similarities pointed out by Tribunal, similarity No. (ii) referred to by it does not appear to be existing. This is because the assessee had entered into an agreement at the inception of its activities of setting up a plant, etc., and the object of the agreement cannot be said to be only for obtaining benefit for running the business, as the business has not yet commenced. The similarities pointed out by the Tribunal do not necessarily lead to the conclusion that payments by the assessee were not of a capital nature.

The Tribunal has not considered the several features of the agreement pointed out earlier, particularly the following :

(a) There is no prohibition to continue to use the know-how already acquired and the manufacture and sale of products even after the termination of the agreement.

(b) The present agreement was entered into pursuant to a collaboration agreement (referred to in this agreement), executed a week earlier and which has not been brought on record. This agreement was entered into at the inception of the company and before the plant was set up. The American company has a major shareholding of over 40 per cent and has the right to terminate the agreement if its holding comes below 40 per cent.

(c) The American company is to provide expertise in the construction of the factory, layout, selection of plant and machinery, provide the know-how and keep the know-how and processes up-dated. The American company has to provide technical personnel in connection with the setting up of the plant and manufacture of products. It has to provide facilities at its own plants or at the plant of their associates for the training of the assessee''s personnel.

(d) There 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 include intermediates and derivatives.

The Tribunal has also referred to Rolls- Royce Ltd. v. Jeffrey (Inspector of Taxes) [1965] 56 ITR 580 (HL), Musker v. English Electric Co. Ltd. [1964] 41 TC 556 (HL) and Commissioner of Income Tax (Central) Vs. Hindusthan General Electrical Corporation Ltd., , 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 the revenue receipt for the purpose of exigibility to tax under the English statute. As observed by our Supreme Court in Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, 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 paying 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 Shri Suryanarayana Murthy, the learned counsel for the revenue, that the construction placed by the Tribunal on the agreement is erroneous. The agreement is the only piece of evidence in this case on the construction of which a decision has to be arrived at. The assessee has not brought on record the collaboration agreement entered into prior to the present agreement. The similarities pointed out by the Tribunal with Ciba of India Ltd.''s case (supra) without considering the other clauses do not necessarily show that the expenditure is not a capital expenditure. Several other clauses in the agreement, which show that the company has acquired enduring benefit under the agreement and expenditure is of a capital nature, have not been considered by the Tribunal. He has also pointed out that the agreement was entered into at the inception of the installation of the factory and plant and not for acquiring know-how for an existing company for its business. He has urged that on the construction of the agreement and the nature of payment, it must be held that this was an expenditure of capital nature. He has urged that the tests laid down in Ciba of India Ltd.''s case (supra) or other cases mentioned by the Praga Tools Ltd. Vs. Commissioner of Income Tax, do not apply to the instant case. He has relied upon the Full Bench judgment of the Madras High Court in Jonas Woodhead and Sons (India) Ltd., Madras Vs. Commissioner of Income Tax, Madras, and the several features of the agreement, particularly those mentioned above in support of his contentions.

Shri Dastur, the learned counsel for the assessee, has reiterated the arguments advanced before the Tribunal and has also supported the conclusions of the Tribunal and its construction of the agreement. He has, in addition to the Ciba of India Ltd.''s case (supra) also relied upon a decision of the Supreme Court in Empire Jute Co. Ltd.''s case (supra). He has also relied upon the Full Bench decision of this Court in Praga Tools Ltd.''s case (supra) which has overruled the Hylam Ltd. Vs. Commissioner of Income Tax, the Full Bench judgment of the Karnataka High Court in Mysore Kirloskar Ltd. Vs. The Commissioner of Income Tax, Bangalore, a judgment of the Delhi High Court in Shriram Refrigeration Industries Ltd. Vs. Commissioner of Income Tax, Delhi-I, and a judgment of the Bombay High Court in Cooper Engineering Ltd. Vs. Commissioner of Income Tax, Bombay City-I, for the proposition that amount paid for acquisition of know-how is not a capital expenditure. He has also placed reliance on the judgment of this Court in Coromandel Fertilizers Ltd. v. CIT (1984) 16 Tax. 85 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 a 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 a 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 would have been given as a deduction from income for the purpose of levy of income tax. 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 revenue expenditure has to be determined on the material and facts of this case. The only material is the agreement produced by the assessee. As observed by the Supreme Court in Empire Jute Mills Co. Ltd.''s case (supra), whether a particular expenditure incurred by the assessee is of capital or revenue in nature is a vexed one. The revenue has placed reliance on the several features pointed out earlier, which distinguish this case on facts from Ciba of India Ltd.''s case (supra). The revenue has also pointed out that the assessee has not produced the collaboration agreement or any other evidence in support of the various contentions now advanced. The assessee''s case mostly rests on the similarities pointed out by the Tribunal and referred to by the learned counsel for the assessee between Ciba of India Ltd.''s case (supra) and this case. The various judgments of the High Court relied upon by him are mostly based upon the said judgment of the Supreme Court in Ciba of India Ltd.''s case (supra). The counsel for the assessee has also placed reliance upon the Supreme Court judgment in Empire Jute Mills Co. Ltd.''s case (supra), the facts in that case and the observations in it show that it dealt with the question whether the payments towards purchase of loom hours in jute industry were a capital expenditure or revenue expenditure with reference to the statutory provisions, the terms of agreement between the members of the association and the nature of the business. The Court in that case came to the conclusion on the facts that the expenditure is a revenue expenditure. I do not think that any ratio laid down in that case applies to the instant case. The learned counsel for the assessee has also relied upon judgment of this Court in Coromandel Fertilizers Ltd.''s case (supra) 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. Whether know-how will become obsolete or not in a particular case will depend upon its facts. The assessee has neither raised this plea nor placed any facts in support of it before the authorities. It has been urged, for the first time, in this Court. The agreement in this case shows that the know-how has to be regularly up-dated 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 up-dated 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 fertilizers in the Coromandel Fertilizers Ltd.''s case (supra), the know-how in this case will also become obsolete. The Coromandel Fertilizers Ltd.''s case (supra) to the extent of the technology becoming obsolete is, therefore, distinguishable on facts. The Full Bench of this Court in Praga Tools Ltd.''s case (supra) as well as the Karnataka High Court in Mysore Kirloskar Ltd.''s case (supra), the Bombay High Court in Cooper Engg. Ltd.''s case (supra) and the Delhi High Court in Shriram Refrigeration Industries Ltd.''s case (supra) had applied the ratio of the Ciba of India Ltd.''s case (supra) having regard to the facts in the cases before them. In this case, as pointed out earlier, the Tribunal has noticed the similarities which are not alone conclusive for applying the ratio in this case. In fact, on a reading and construction of the agreement there are several features which would distinguish this case from Ciba of India Ltd.''s case (supra), particularly :

(a) The agreement was entered into pursuant to a collaboration agreement, which is not on record. It was at the very inception of the activities of the company, that is, on its formation. The agreement empowers not only transfer of know-how but also consultancy assistance and help in several other areas. The American company is a major shareholder of the assessee and associated with it as a collaborator since the inception. There is a pro vision for the American company to terminate the agreement if its equity holding falls below 40 per cent. It cannot, therefore, be said that this payment was only for know-how acquired. Nor is it for either running an existing business or taking up a new item for manufacture in connection with a running business.

(b) There is no prohibition for the assessee to continue the manufacture of products by use of the knowledge acquired through the process and the plant and machinery erected pursuant to agreement even after the termination of the agreement.

(c) The products to be manufactured are to be sold under generic names and include derivatives and intermediates.

On the facts, in this case, it cannot be said that the ratio of Ciba of India Ltd''s case (supra) can be applied in toto. It may be that the know-how forms a part of consideration for which the payments are made. The assessee has not chosen to place any material for appointment of the payments and because of this the AAC had made an estimate of the apportionment of 80 per cent towards capital expenditure and 20 per cent towards revenue expenditure. The assessee''s case before the Tribunal was that the entire amount should be treated as revenue expenditure and it did not choose to take an alternative plea of apportionment. It is not possible to make an apportionment as no material is available. The expenditure incurred cannot be said to be only for technical know-how. Technical know-how is knowledge and is intangible property having 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 to 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 not be answered.

Question No. 11 is answered in the affirmative and in favour of the assessee.

Question No. 12 is answered in the negative and against the assessee.

Question No. 13 is answered in the negative and against the assessee.

Question No. 14 is answered in the affirmative and in favour of the assessee.

Question No. 15 is answered in the negative and against the assessee to the extent indicated above.

Question No. 16 is answered in the affirmative and in favour of the assessee.

Question No. 17 is answered in the affirmative and in favour of the assessee.

Question No 18 is answered in the affirmative and in favour of the assessee, and

Question No. 19 is answered in the affirmative and in favour of the assessee.

The reference is answered, accordingly. In the circumstances of the case, parties shall bear their own costs.