Commissioner of Income Tax, Tamil Nadu-II vs Madras Rubber Factory Ltd.

Ramanujam, J.—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 :

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 ?

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 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.

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 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 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 Commissioner of Income Tax Vs. Textile

Machinery Corporation, 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 decision cited in support of them, held that as per the test laid down by the Gujarat

High Court in Nagardas Bechardas and Brothers P. Ltd. Vs. Commissioner of Income Tax, Gujarat, , 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.

So far as the first question is concerned, it is seen that it is covered by a decision of this court, rendered on September 17, 1982, in T.C. No.

774 and 775 of 1976, 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 or is a reconstruction of an existing establishment or business.

Section 80J of the 1961 Act corresponds to s. 15C of the 1922 Act. The scope of s. 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

started manufacturing some castings which the concern was previously buying from the market, but 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 jute mill were

utilised by the assessee concerned. The assessee claimed relief under s. 15C. The I.T. authorities held that the two units were formed by

reconstruction of the business already existing, within the meaning of s. 15C(2)(i). But, the Appellate Tribunal differed and held that the assessee

was entitled to the relief under s. 15C because the two divisions were new industrial undertakings and that they were not formed by reconstruction

of the existing business. On a 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 s. 15C(2)(i). On appeal, the

Supreme Court reserved 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 s. 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 s.

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 s. 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 and Brothers P.

Ltd. Vs. Commissioner of Income Tax, Gujarat, 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 relief on the decision of the Gujarat High Court in Nagardas Bechardas and Brothers P. Ltd. Vs.

Commissioner of Income Tax, Gujarat, . The Supreme Court has specifically overruled the decision of the Calcutta High Court in Commissioner of

Income Tax Vs. Textile Machinery Corporation, , and the decision of the Delhi High Court in The Commissioner of Income Tax, Delhi Vs. Naya

Sahitya, Delhi, , 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 applied to the facts of this case. The decision of the Tribunal in this case is quite in accords 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

costs to the assessee. Counsel''s fee Rs. 500.