- (1.) At the instance of the Revenue, the following two question of law have been referred to this court by the Income-tax Appellate Tribunal, under s. 256(1) of the I.T. Act, 1961 : "1. Whether the entire technical aid fees and royalty paid to the foreign collaborator under the agreement dated September 4, 1961, should be allowed as deduction and no portion of it should be disallowed capital expenditure 2. Whether the assessee was entitled to relief under section 80J(4)(i) in respect of the plant put up at Kottayam for manufacture of masticated rubber -
(2.) The assessee in this case has paid a sum of Rs. 4,79,481 being the gross amount of technical charges to the Mansfield Tyre & Rubber Company, U.S.A., in terms of the collaboration agreement dated September 4, 1961. The ITO disallowed 25 per cent. of the gross amount of the royalty and technical charges so paid and this was confirmed in appeal by the AAC. The matter was taken to the Tribunal and the Tribunal held that the entire royalty payment made in terms of the collaboration agreement should be allowed as a deduction. Aggrieved by the decision of the Tribunal in the that regard, the Revenue has raised the first question set out above.
(3.) The assessee was granted an industrial licence in September, 1960, to produce automobile tyres and tubes at its factory at Thiruvottiyur. The initial capacity was three lakhs of tyres and tubes. Masticating of rubber is one of the processes in the ultimate production of tyres and tubes. The assessee, however, was getting the said work done by third parties. However, in the year 1969, the assessee set up a unit at Kottayam for producing masticated rubber. The assessee claimed s. 80J relief in respect of its Kottayam unit which started work in the previous year relevant to the assessment year. The ITO held that the assessee is not entitled to the benefit of s. 80J as the Kottayam unit is not a "new industrial undertaking" as contemplated by that section. The assessee took the matter in appeal to the AAC, who also held that the Kottayam unit is only an ancillary to the already existing industrial undertaking of the assessee and, therefore, it is not entitled to the relief under s. 80J. In support of his conclusion, the AAC relied on the decision of the Calcutta High Court in CIT v. Textile Machinery Corporation [1971] 80 ITR 428. The assessee took the matter in appeal to the Tribunal. Before the Tribunal, the assessee, relying on the decision of the Gujarat High Court in Nagardas Bechardas & Brothers P. Ltd. v. CIT [1976] 104 ITR 255, contended that the Kottayam unit is a self-contained independent unit, set up at heavy capital cost, to produce a commercial product, that it is a new venture without affecting the original character of the Thiruvottiyur unit, that the Thiruvottiyur unit is not intrinsically altered to any extent and it continues to manufacture automobile tyres and tubes in the same way even after the establishment of the Kottayam unit and that, therefore, the Kottayam unit should be taken to be a new industrial undertaking. As against the said contentions, the Revenue contended that the Kottayam unit is only an expansion of the already existing industrial establishment at Thiruvottiyur and since the Kottayam unit had been established only to fulfill the needs of the existing industrial undertaking in the manufacture of tyres and tubes, Kottayam unit should be taken to be an ancillary to the Thiruvottiyur unit and that, therefore, the Kottayam unit is not entitled to the relief under s. 80J. In support of its submissions, the Revenue relied on the decision of the Calcutta High Court in CIT v. Textile Machinery Corporation [1971] 80 ITR 428 and the decision of the Delhi High Court in CIT v. Naya Sahitya [1972] 84 ITR 567. The Tribunal, after due consideration of the rival contentions and the decision cited in support of them, held that as per the test laid down by the Gujarat High Court in Nagardas Bechardas & Brothers P. Ltd. v. CIT [1976] 104 ITR 255, the Kottayam unit will come under the expression "new industrial undertaking" as contemplated in s. 80J. Aggrieved by the said view of the Tribunal, the Revenue has raised the second question.;