COMMISSIONER OF INCOME TAX Vs. WARNER HINDUSTHAN LIMITED

JUDGEMENT

(1.) This is a reference under section 256(1) of the Income-tax Act, 1961. The assessee is a public limited company. Their accounting year is the calendar year. For the assessment years 1970-71 and 1971-72, the Income-tax Officer had rejected certain pleas raised by the assessee and made the assessment orders. The assessee carried the matter in appeal to the Appellate Assistant Commissioner who, by a single consolidated order, partly allowed the two appeals. Against the said order, the assessee filed two appeals and the Revenue also filed two appeals before the Income-tax Appellate Tribunal. The said four appeals were disposed of by the Tribunal by a common order dated 24/03/1976, by which the Tribunal dismissed the appeals of the Revenue and partly allowed the appeals preferred by the assessee. Both the assessee and the Revenue filed applications for reference before the Tribunal under section 256(1) of the Income-tax Act. On the said applications, the Tribunal has made the instant reference by which opinion of this court is sought on 19 questions mentioned in it. Questions Nos. 1 to 7 are at the instance of the Revenue and questions Nos. 8 to 19 are at the instance of the assessee. These questions are :

(2.) The assessee who was having an existing business of manufacture and sale of pharmaceuticals (which was started in about 1965), had set up two new manufacturing units, viz., a Chemical Unit which commenced production on 20/03/1969, and a Chewing Gum Unit which commenced production on 7/07/1969. The assessee had claimed relief under section 80J of the Act for the two accounting years 1969 and 1970 relevant for the two assessment years regarding which this reference is made. The working of the Chemical Unit which commenced production from 20/03/1969, resulted in a loss of Rs. 49,30,316 for the assessment year 1970-71. For the assessment year 1971-72, it earned a profit of Rs. 4,96,426 (Rs. 4,57,299(?)) before setting off of carry forward loss of the year 1970-71. Since the cumulative result of the two years work was a loss of over Rs. 45 lakhs, the Income-tax Officer held that there was no income entitled to deduction under section 80J, even though the assessees case was that this loss of the Chemical Unit was fully absorbed by the profit of its other activities. The view of the Income-tax Officer has been affirmed by the first appellate authority and also by the Tribunal relying upon the decision of the Madras High Court in Rajapalayam Mills Ltd. v. CIT [1970] 78 ITR 677. The Income-tax Officer while calculating the deduction under section 80J, for the calendar year 1969, had restricted the relief to the proportionate period of the year after the production commenced, while the assessee had claimed relief for the entire year. The Tribunal has, however, accepted the contention of the assessee and calculated the relief for the entire accounting year, i.e., 1969. The assessee had raised a question of virus of rule 19A(3) before the authorities. While the Income-tax Officer and the first appellate authority held that they could not go into the question of virus, the Tribunal-expressing doubt about its jurisdiction-held that the said provision was not, ultra virus section 80J. For the purpose of granting relief under section 80J on the basis of the capital employed, the Tribunal had, with reference to rule 19A(3), for deducting liabilities mentioned therein, made a distinction between "debt due and payable" and "debt owed" by the company. It also applied the principle for debts owed to the company and debts due and payable to the company for the purpose of determining assets under rule 19A(2). The Income-tax Officer had not treated the capital expenditure on scientific research as an asset for the purpose of rule 19A(2) on the ground that a deduction from income liable to tax was already allowed under section 35(2)(ia) of the Act. The Tribunal had, however, agreed with the contention of the assessee and included the said sum as an asset for calculating the capital employed. The Income-tax Officer had disallowed certain pre-paid expenses which were not liable to tax in the relevant year from the calculation of assets for the purpose of rule 19A(2). The Tribunal had, however, accepted the assessees contention and held that these were assets within the meaning of rule 19A(2). The Income-tax Officer had disallowed the claim of the assessee that the excess amount payable towards advance tax, according to its books, should be included as an asset. This view has been affirmed by the Tribunal The Income-tax Officer had deducted as liabilities under rule 19A(3), the amounts lying with the company towards unclaimed dividends and application money for the issue of equity shares. The Tribunal had affirmed the view of the Income-tax Officer. The Income-tax Officer had also not allowed the claim of the assessee for depreciation on the cost of digging a well. The Tribunal had, however, accepted the claim of the assessee. The Income-tax Officer had held that a sum of Rs. 81,260 for the assessment year 1971-72 ought to be included in the taxable income of the assessee as they represent excess perquisites paid by it. The Tribunal had, however, held that these were cash payments and the assessee was not liable to be taxed o them.

(3.) Questions Nos. 2 to 5 and 8 to 19 relate to the grant of relief under section 80J read with rule 19A. Questions Nos. 1 and 7 deal with some minor disputes. Question No. 6 deals with the controversy about the technical fees paid to M/s. Warner Lambert Pharmaceutical Company, USA., being a capital expenditure or a revenue expenditure.