1. In this reference under s. 256(1) of the I.T. Act, 1961, the Income-tax Appellate Tribunal, Bombay Bench 'C', has referred the following two question for our consideration:
'(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to the allowance in respect of the research expenses incurred by the assessee in the sum of Rs. 2,55,837 ?
(2) Whether, on the facts and in the circumstances of e case, the sum of Rs. 10,000 out of Rs. 19,093, being foreign travelling expenses, has been rightly treated as capital expenditure not allowable as a deduction in the computation of the assessee total income ?'
2. As para. 6 of the statement of the case indicates, question No. (1) was referred as arising out of the application by the Commissioner. Question No. (2), according to the statement of the case, arose out of the reply filed by there assessee to the Commissioner application. It would appear that the view of the Supreme Court as disclosed in CIT v. V. Damodharan : 121ITR572(SC) , seems to be that unless the two question are interconnected, such a reference on a reply will be incompetent. It is clear that the two questions before us are pertaining to separate and distinct matters and are not interconnected. If that be so, we are bound by the decision must considered void the reference to the extent of the second question.
3. We shall, therefore, restrict out discussion to question No. (1) which has been referred to us at the instance of the Commissioners.
4. A sum of Rs. 2,55,837 has been claimed by the assessee in the return as research expenses of the assessment years 1965-66. The details of the said expenditure was furnished to the ITO by the assessee in a note Rs. 2,86,575 was paid by the assessee-company to International Paper Company, 220, East 42nd Street, New York, N.Y., in connection with research on pulping of bamboo and conversion of such pulp into yarn, which research was performed at the Mobile Alabama Research Laboratory of the International Paper Company. It would appear that the assessee had paid a total sum of Rs. 2,86,575 to the American company during the period September, 1961, to June, 1963, out of which a sum of Rs. 30,738 has been received back in the accounting years 1964 and 1965. The new balance amount of Rs. 2,55,837 was then carried to the balance sheet and claimed in the returns as research expenses. According to the finding of the ITO, the assessee-company was doing business during the assessment year in the manufacture of rayon yarn, tyre cord and chemicals. The assessee proposed to set up a plant at Nanjangud in Mysore State for the manufacture of pulp from bamboo. According to the ITO, although purple is admittedly the principal raw material for the manufacture of viscose rayon, the bamboo pulp project contemplated by the assessee was new and altogether different from the business carried on by the assessee during the instant year. The ITO accordingly was of the opinion that the expenditure was not related to the business within the meaning of s. 35(1)(i) of the I.T. Act, 1961. Accordingly he disallowed the claim.
5. The assessee being aggrieved by the disallowance carried the matter before the AAC, who has in para. 8, 9 and 10 of his order dealt with the reason given for disallowance by the ITO and the rival contention thereon. The AAC observed that the International Paper Company of New York was carry in on research to find out whether the pulp sent by the appellant-company could be useful to the appellant as their raw material. According to the AAC, the reports sent by the American company clearly indicated that they were doing research to develop a process to make textile grade dissolving pulp from bamboo for the appellants proposed rayon pulp mill in India. According to the AAC, this indicated that the expenses were not related to the business which was being carried on by the assessee during the relevant period. In this view of the matter, he upheld the disallowance by the ITO.
6. The assessee carried the matter further to the Income-tax Appellate Tribunal. It was contended by the learned counsel for the assessee before the Tribunal that the ITO and the AAC were wrong in rejecting the claim of the assessee-company which was covered by the provision of s. 35(1)(i) of the I.T. Act. Under the said provision a deduction is permitted in respect of any expenditure laid out or expended on scientific research related to the business of the assessee. According to the counsel, the purposes of the research was to substitute the wood pulp, which was being imported for being used for the manufacturing activity of the assessee-company, by bamboo pulp. The expenditure as well as the object of the research, therefore, clearly related to the business of the assessee. The assessee also contended, in the alternative, that the claim be allowed under s. 37. On behalf of the Revenue it was urged that the expenditure was no allowable because, (i) the research was not carried on by the assessee-company itself, (ii) the scientific research had no relation with the business of the assessee-company. It was further submitted that the claim was not allowable even under s. 37 of the I.T. Act because it was not incurred wholly and exclusively for the purposes of the assessee-company business, which was clearly the manufacture of rayon yarn tyre cord and chemicals. The Tribunal rejected the contention advance on behalf of the Department that the research was required to be carried on by the assessee-company itself. Further, according to the Tribunal, a plain reading of the statutory provision made it abundantly clear that all that the assessee had to establish was a reasonable nexus between the scientific research undertaken and the business of the assessee-company. According to the Tribunal the view taken by the ITO and confirmed by the AAC that only such research would be relevant or could be said to be related to the business. If that research could be connected with the present business or the present manufacturing activities of the assessee-company was too narrow a view. In the opinion of the Tribunal, the words used in the statutory provision are 'related to', and research undertaken being one pertaining to substitution of the existing raw material by another which was more easily and economically available must be regarded as being related to the business of the company. The Tribunal accordingly held that the assessee-company was entitled to a deduction of the entire amount under s. 35(1)(i) of the I.T. Act. It is this conclusion of the Tribunal which is questioned by the Commissioner in this reference.
7. We are of the opinion that the approach of the Tribunal as well as the conclusion in favour of the assessee is wholly justified and is borne out by the phraseology employed in the statutory provision. The first of the two arguments above extracted which were advanced on behalf of the Revenue before the Tribunal, namely, that the research must have been carried on by the assessee-company itself, is not borne out by the phraseology of the statutory provision. In CIT v. Ciba of India Ltd. : 69ITR692(SC) , where the Supreme Court was, inter alia, considering s. 10(2) (xv) of the Indian I.T. Act, 1922, it has been made clear that an assessee can claim the amount as a permissible deduction although the research was carried on by some other persons, provided the research was carried on for or on behalf of the assessee. It does not appear to have been urged before Tribunal that the International Paper Company, or more accurately its Mobile Research Laboratory at Alabama, had not carried on the said research for or on behalf of the assessee-company. The bald argument that the deduction under s. 35(1)(i) is not available, unless the expenditure is incurred for research carried on by the assessee-company, is not justified by the phraseology employed by the statutory provision and is against the observation of the Supreme Court in Ciba's case : 69ITR692(SC) , which dealt with a comparable statutory provisions under earlier Act.
8. Equally weak, in our opinion, it s the second limb of the argument, namely, that 'related to business' must be interpreted in the narrow manner which appealed to the ITO and the Ac in the instant case, namely related to the present business of manufacturing activities of the assessee-company. The activities of the assessee-company in the years in which the expenditure was incurred were, inter alia, the manufacture of rayon yarn. The research activity pertained to substitution of the raw material currently being used. Assuming that the narrower approach, namely, that the present activities alone ar to be considered is acceptable, even then, in our opinion, the research undertaken must be property regarded as being related to the business of the assessee-company. To take any other view must be therefore, the Tribunal was right in allowing this deduction to the assessee.
9. In the result, the question referred to us must be answered in the affirmative and in favour of the assessee. The Commissioner to pay the costs of the reference to the assessee.