1. The assessee in this reference is an Indian company. Under collaboration with an American company called Mans-field Tyre and Rubber Compant Inc., the assessee set up an automobile tyre manufacturing unit. The collaboration agreement provided for payment by the assessee to Mansfield royalties or fees in consideration of the supply by Mansfield of specifications, formulae and other technical information for carrying on production in the factory. These fees were to be calculated as a particular fraction or percentage of the gross sale value of the tyres and other products produced by the factory. The assessee claimed that the fees paid by it to Manfiel'd consitute current revenue expenditure and must be allowed as such in the computation of its income. The ITO, however, disallowed 25% of the fees paid to Manfield on the score that it represented capital expenditure. The disallowance by the officer on this account was based on the theory that the technical know-how gained by the assessee was of an enduring benefit to the assessee and any business expenditure which produces enduring advantage to the business must be held to be capital expenditure. The Tribunal differed from the ITO's view and allowed the entire payment of the royalties as a revenue deduction. In this reference, the Department canvasses the Tribunal's determination in the following question of law :
'whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the entire payment of royalties made by the assessee-company to its collaborator, M/s Mansfield Tyre & Rubber Company, U.S.A., was revenue expenditure and, therefor, liable to be allowed as a deduction from the income of the assessee ?'
2. A similar question in this very assessee's case for other assessment years figured before this court in two other references. We heard them along with this case. We have dealt with the question in detail in a separate judgment which we have delivered today in those references. Briefly stated, we expressed the view that, having regard to the terms of the collaboration agreement and to the nature and object of the payment made by the assessee to Manfield, no part of the royalties can be held to partake of the nature of capital expenditure, even on the footing that the technical information purveyed by Manfield for runing the tyre factory tended to be of lasting benefit to the assessee. For the reasons set out in greater detail in that judgment, we answer the question of law in this case in the affirmative and against the Department.
3. One another question of law for our consideration in this reference bears on a different topic, namely, the computation of the relief under s. 80-I claimed by this assessee. The controversy between the parties is brought out in the frame of the question, which is as under :
'whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the relief under section 80-I should be granted on the profits before set off of unabsorbed depreciation and development rebate carry forward ?'
4. The assessee's tyre manufacturing unit, run under foreign collaboration, is a priority industry within the meaning of the I.T. Act. There is no dispute about this fact. There is also no dispute about the assessee's eligibility for relief under s. 80-I. The controversy appertains only to the mode of arriving at the quantum of relief.
5. The relief under s. 80-I takes the form of a straight deduction in the total income. The amount to be deducted is to be calculated at 8 per cent. of 'the profits attributable to the priority industry'. This is the wording of s. 80-I. The section is a rehash of a former provision in the Act, which at that time was enacted as s. 80E. This earlier provision also employed the same basis for working out the tax relief for priority industries. It also used the same expression' profits attributable to the priority industry.' The Supreme court had had occasion to construe this phrase in s. 80E in Cambay Electric Supply case : 113ITR84(SC) . They said that the section must be construed in a board sense, especially the word 'attributable to' occurring in the phrase 'profits attributable to the priority industry.' They contrasted this expression from another expression employed by the Act to grant tax relief, namely, the expression 'derived from'. The court said that 'attributable to' must be read as more comprehensive than 'derived from.'
6. The controversy in the present case is about the computation of the profits attributable to the assessee's priority industry for the year ended September 30, 1968, relevant to the assessment year 1969-70. The difference in the assessee's working and the Department's computation lies in a narrow compass. According to the ITO, in computing the profits attributable to the priority industry for a given year the carry forward depreciation and the carry forward development rebate of past years must also be deducted. According to the assessee, on the other hand, these items should not be deducted and only the current year's depreciation and development rebate must be deducted.
7. In the computation of the assessee's total income, which includes the profits from the tyre factory, the assessee had claimed deduction for the carry forward of past years' unabsorbed depreciation and development rebate, and this clam was allowed, and rightly so. For obtaining the eight per cent. relief under 80-I, however, the assessee wants to add back the unabsorbed depreciation and development rebate granted as deduction in the assessment of the business income. This is quite a double standard or double-think on the question of determination of business profits and the allowances of deductions under the I.T. Act. Cases in the books show that taxpayers are not alone in applying this double standard. As the Supreme Court's decision in company Electricals : 113ITR84(SC) illustrates, even the Department feels nothing wrong about taking up janus-faced attitudes on issues of this kind. In that case, the Department, while assessing taxpayer's business income, included therein the profit on sale of his machinery, as balancing charge, under s. 41(2). This did not, however, dater the Department from arguing before the Supreme court that the amount so included for purposes of assessment must, however, be excluded for purposes of computation of the profits attributable to the priority industry under s. 80E of the Act. The supreme court thus witnessed the strange spectacle of the income-tax Department insisting that an item of receipt, which was admittedly an income receipt, must be excluded from the computation of business income, all for the sake of denying the eight per cent. relief which the assessee asked for on the income receipt in question. The Supreme court did not countenance this argument, but held that whatever was to be included in the computation of profits under the general provisions of the Act would fall within the phrase 'profits attributable to the priority industry.' In effect, the Supreme Court established the principle that the same standards must apply both for the computation of the special relief under s. 80-I and for the computation for the general purposes of assessing the business income. There cannot, in other words, be one law for assessment of tax on business income and another law for assessment of tax relief on business income.
8. The question at issue in the present case about unabsorbed depreciation and unabsorbed development rebate is, therefore, to be decided by following the Supreme court's ruling on the proper line of approach for the computation of profits attributable to the priority industry. If the matter were ne of first impression, which it is not, there might be something to be said for the assessee's standpoint that carry forward development rebate, at any rate, cannot be deducted while reckoning the profit attributable to the priority industry. This argument can also be supported, in some measure, on the terms on which the relevant carry forward provisions are couched in the Act. Section 33(2) shows that where development rebate of a year not only absorbs the business income of that year but spills over, then the excess can be spread and set off against income under other heads in the same year so as to reduce the total income of that year to nil. It is only where, even after this adjustment, part of the development rebate still remains unabsorbed, that the question of carry forward comes in. But, even in the matter of carry forward, the past years' unabsorbed depreciation is not restricted, in its set off, to the business income of the subsequent year. On the contrary, the unabsorbed development rebate has to be set off so to reduce the total income of the subsequent year to nil, whether there is business income or not in that year. In the face these provisions in s. 33(2), it might, as a matter of first impression, be urged that past years' unabsorbed development rebate is not treated even by the Legislature as a business deduction, par excellence, of later years, in marked contrast to s. 32(2) which regards past years' unabsorbed depreciation as the current depreciation of the subsequent years.
9. What is more, on first principles of fiscal accounting, it may even be open to taxpayer to argue that development rebate is not so much a deduction for arriving at net profits, but a measure of tax relief, pure and simple. This theoretical argument may be rested on the circumstances that development rebate bears on the same machinery whose entire cost, sooner or later, would be charged against profits, as depreciation allowance year after, and as balancing allowance in the year in which it is ultimately discharged.
10. The matter, however, is not res integra, susceptible to argument on first principles. In the case which we have earlier mentioned more than once, the Cambay Electrical's case : 113ITR84(SC) , the Supreme court have eschewed all these niceties. They held that 'items like unabsorbed depreciation and unabsorbed development rebate will have to deducted in arriving at the figure which would be exigible to deduction at 8 per cent. under section 80E(1)'.
11. We have earlier pointed out that s. 80E, which the Supreme Court had to construe and apply in the Cambay case, employed the same expression 'profits attributable to the priority industry' which is found in the provision presently under discussion, namely. s. 80-I Besides, both the provisions require that the profits of the priority industry must form part of the assessee's total income as computed under the Act. This latter requirement was imbedded in the very text of s. 80E. Under the present dispensation, this requirement is not enacted into s. 80-I, but a new phrase 'gross total income' has been coined, also defined in s. 80B in such a way that the same result flows. In our view, therefore, the ruling of the Supreme court on s. 80E is applicable to the deductions of unabsorbed depreciation and development rebate under s. 80-I as well.
12. It is quite a comfort that we had a Superem Court ruling for seeing an early end of the controversy in this case. Section 80-I is now no more. But there are other relief provisions in chap. VI-A based n the method of 'straight deduction' from total income for granting tax relief. The critics of the 1922 Act had blamed the Legislature for the complexity of its relief provisions. They recommended a uniform mode of giving tax relief by way of straight deductions. Chapter VI-A evidently reflected this urge, when it bought all tax relief provisions under one single roof, as it were, and it brought all tax relief provisions under one single roof as it were, and when it hitched the quantum of relief to income, by way of straight deductions. It was the boast of those who sponsored this law reform that the system, as altered, was more sensible and was much easier to work than the 1922 provisions. Subsequent experience, however, has believed the earlier hopes and expectations. Whatever chap VI has brought about, is has not brought relief to courts and others engaged in the incessant task of statutory interpretation. It has only led to more and more litigation between the taxpayers and the Revenue, with the ever present risk that first principles of fiscal accounting might get lost or distorted in other cases in the books have witnessed will continue to rage as long as the provisions retain their existing format.
13. Be that as it may, for the reasons we have earlier stated, we answer the second question of law in the negative and against the assessee. We hold that the unabsorbed depreciation and development rebate of past years must be deducted from the profits of the assessee's tyre factory for the year concerned and then only the relief at 8 per cent. will have to be worked out for determining the tax relief under s. 80-I available to the assessee for the assessment year.
14. In view of the mixed results of this reference, we make no order as to costs.