Commissioner of Income Tax vs Madras Rubber Factory Ltd.

Ramanujam, J.—At the instance of the revenue, the following two questions of law have been referred to this Court by the Tribunal, u/s 256(1) of the income tax Act, 1961 (''the Act''):

Whether, the entire technical aid fees and royalty paid to the foreign collaborator under the agreement dated 4-9-1961, should be allowed as deduction and no portion of it should be disallowed as capital expenditure?

Whether, the assessee was entitled to relief u/s 80J(4)(i) in respect of the plant put up at Kottayam for manufacture of masticated rubber ?

The assessee in this case has paid a sum of Rs. 4,79,481, being the gross amount of technical charges in terms of the collaboration agreement dated 4-9-1961 to the Mansfield Tyre & Rubber Co., USA.

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 that regard, the revenue has raised the first question set out above.

The assessee was granted industrial licence in September 1960 to produce automobile tyres and tubes at their factory at Thiruvottiyur. The initial capacity was 3 lakhs numbers 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 section 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 section 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 had 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 u/s 80J. In support of his conclusion, the AAC relied on the decision of the Calcutta High Court in Commissioner of Income Tax Vs. Textile Machinery Corporation, . 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 and Brothers P. Ltd. Vs. Commissioner of Income Tax, Gujarat, , 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 fulfil 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 u/s 80J. In support of its submissions, the revenue relied on the decision of the Calcutta High Court in Textile Machinery Corpn. (supra) and the decision of the Delhi High Court in The Commissioner of Income Tax, Delhi Vs. Naya Sahitya, Delhi, The Tribunal, after due consideration of the rival contentions and the decisions cited in support of them, held that as per the test laid down by the Gujarat High Court in Nagardas Bechardas & Bros. (P.) Ltd.''s case (supra), the Kottayam unit will come under the expression ''new industrial undertaking'' as contemplated in section 80J. Aggrieved by the said view of the Tribunal, the revenue has raised the second question.

So far as the first question is concerned, it is seen that it is covered by a decision of this Court in Commissioner of Income Tax, Tamil Nadu-III Vs. Madras Rubber Factory Ltd., , which is against the revenue. In that case, this Court has held that the royalty and the technical aid fees paid to the foreign collaborator under the collaboration agreement should be treated as revenue expenditure and as such, the entire payment has to be deducted. Following the said decision, we have to answer the first question in the affirmative and against the revenue.

Coming to the second question, it is seen that the assessee was previously procuring masticated rubber, which is a raw material for the manufacture of automobile tyres and tubes, from others without itself undertaking the process of masticating rubber in its factory at Thiruvottiyur. Subsequently in the year 1969, the assessee started a new and separate venture for masticating rubber. This unit is found to be a self-contained, independent unit. This unit is engaged in the process of masticating rubber and sells the resultant product not only to the assessee-company, but also to outsiders. The Kottayam unit has not affected intrinsically or otherwise any of the operations in the existing unit at Thiruvottiyur. On these facts, we cannot agree with the contention of the revenue that the establishment of the Kottayam unit is only an extension or enlargement of the activities of the old establishment at Kottayam and it is a reconstruction of an existing establishment or business. Section 80J corresponds to section 15C of the Indian income tax Act, 1922. The scope of section 15C came to be considered by the Supreme Court in Textile Machinery Corporation Limited, Calcutta Vs. The Commissioner of Income Tax, West Bengal, In that case, a heavy engineering concern manufacturing boilers, machinery parts, wagons, etc., set up two new units, a steel foundry division and a jute mill division. The steel foundry division started manufacturing some castings, which the concern was previously buying from the market, and the castings were mostly used by the other existing divisions of the assessee. Raw materials were supplied by the boiler division to the jute mill division and after machining and forging, the parts were given back by the jute mill division to the boiler division. Thus, the entire articles produced by the foundry and also the next jute mill were utilised by the assessee-concerned. The assessee claimed relief u/s 15C. The income tax authorities held that the two units were formed by reconstruction of the business already existing within the meaning of section 15C(2)(i) ; but the Tribunal differed and held that the assessee was entitled to the relief u/s 15C because the two divisions were new industrial undertakings and that they were not formed by reconstruction of the existing business. On reference, the Calcutta High Court held that producing one''s own goods systematically used in the existing business instead of buying them from outside would only be a reconstruction of an existing business within the meaning of section 15C(2)(i). On appeal, the Supreme Court reversed the decision of the Calcutta High Court, holding that the steel foundry and the jute mill were not formed by the reconstruction of the business already in existence within the meaning of section 15C(2)(i) and that, therefore, the assessee was entitled to the exemption claimed. It was held that for the reconstruction of an existing business, there must be transfer of the assets of the existing business to the new industrial undertaking and the new activity launched by the assessee by establishing new plants and machinery by investing substantial funds may produce the same commodities of the old business or it may produce some other distinct marketable products, which may feed the old business and still the new undertaking cannot be said to be an integrated unit of the old business. The Supreme Court also held that for the purpose of section 15C, the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities and that in order to deny the benefit of section 15C, the new undertaking must be formed by reconstruction of the old business. The Supreme Court, in that case, specifically approved the decision of the Gujarat High Court in Nagardas Bechardas & Bras (P.) Ltd.''s case (supra) and of the Calcutta High Court in Commissioner of Income Tax Vs. Hindustan Motors Ltd., . As already seen, the Tribunal, in the instant case, had relied on the decision of the Gujarat High Court in Nagardas Bechardas & Bros. (P.) Ltd.''s case (supra). The Supreme Court has specifically overruled the decision of the Calcutta High Court in Textile Machinery Corpn.''s case (supra) and the decision of the Delhi High Court in Naya Sahitya''s case (supra), which have been specifically relied on by the revenue before the Tribunal as also before us. On the facts of the present case, there is absolutely no evidence to indicate that any asset of the existing undertaking had been transferred to the new unit at Kottayam. It is also seen that the Kottayam unit was set up with new plants and machinery for producing masticated rubber. Though a substantial portion of the masticated rubber produced by the Kottayam unit is used up by the existing undertaking of the assessee-company, it cannot be said that the Kottayam unit was established in the process of reconstruction of the existing business or establishment. The decision of the Supreme Court referred to above, therefore, squarely applies to the facts of this case. The decision of the Tribunal in this case is quite in accord with the view expressed by the Supreme Court in the above case. Therefore, we answer the second question in the affirmative and against the revenue. The revenue will pay cost to the assessee. Counsel''s fee Rs. 500.