B.N. Kirpal, J.
1. In respect of the assessment years 1968-69 and 1969-70, the Income-tax Appellate Tribunal, under section 256(1) of the Income-tax Act, 1961, has referred a few questions of law to this court. Though most of the questions are overlapping, we shall, however, deal with the questions separately.
For the assessment year 1968-69 :
In respect of the assessment year 1968-69, the Tribunal has referred six questions of law to this court. These are as follows :
'1. Whether, on the facts and in the circumstances of the case, the assessed is entitled to depreciation under section 32(1)(ii) of the Income-tax Act, 1961, in respect of blocks and toolings of Rs. 22,750 acquired and used in the previous year 1967-68 relevant to the assessment year 1968-69
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the grounds regarding the computation of capital employed in the industrial undertaking and the quantum of deduction under section 80J could not be agitated before it under sections 253 and 254 of the Income-tax Act, 1961
3. Whether, on the facts and in the circumstances of the case, the depreciation of the current year is deductible in computing the profits and gains for granting relief under section 80-I of the Income-tax Act
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no appeal lay to the Appellate Assistant Commissioner against charge of interest under section 217 of the Income-tax Act, 1961
5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessment made by the Income-tax Officer on January 29, 1973, under section 143(3) of the Income-tax Act, 1961, for the assessment year 1968-69 was valid in law
6. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessed was not entitled to take the additional ground claiming surtax levied for 1968-69 as a deduction for computation of income from business before it for the first time ?'
The first question refers to the interpretation of section 32(1)(ii) and of the proviso thereto in particular. At the relevant time, the said provision read as under :
'32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessed and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed - ...
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed :
Provided that where the actual cost of any machinery or plant does not exceed five thousand rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessed for the purposes of his business or profession :
Provided further that no deduction shall be allowed under this clause in respect of any motor car manufactured outside India, where such motor car is acquired by the assessed after February 28, 1975 and is used otherwise than in a business of running it on hire for tourists.'
According to the statement of the case, the assessed had claimed depreciation on plaint and machinery. The total claim was for a sum of Rs. 2,89,690. Out of this, tools of the value of Rs. 22,750 were such that each of them was of a value of less than Rs. 750. The said tools, of the value of Rs. 22,750, with which we are concerned in question No. 1, had been purchased and put to use in the previous year relevant to the assessment year 1967-68. In the other words, the said tools had been purchased and utilised, for the first time, in the assessment year prior to the assessment year with which we are concerned in this reference.
The Income-tax Officer construed the said proviso to section 32(1)(ii) to mean that depreciation at the rate of 100 per cent. was allowable only in the assessment year 1967-68, but as it was not claimed in that year the assessed was not entitled to claim, in subsequent years, depreciation under section 32(1)(ii) of the Income-tax Act, 1961. This conclusion of the Income-tax Officer was upheld by the Appellate Assistant Commissioner and also the Income-tax Appellate Tribunal.
It has been contended before us by Mr. Bishamber Lal, advocate, that the right of the assessed to claim depreciation under the substantive provision, namely, section 32(1)(ii) is not taken away by virtue of the enactment of the proviso. On the other hand, the reasoning of the Revenue authorities has been supported by Mr. Rajendra who has submitted that the assessed can claim depreciation on these tools, each of which has a cost of less than Rs. 750, only in the year in which they are first used.
Before examining the rival contentions, it is pertinent to note that the aforesaid proviso was inserted by the Finance Act, 1966, with effect from April 1, 1966. Prior to its insertion, plant, machinery and other items including tools were entitled to depreciation under the provisions of section 32(1)(ii). Depreciation is to be claimed at the rates which are prescribed from time to time. We are informed that in the year in question, the rate of depreciation, for the first years, was 30 per cent. It is after deducting the depreciation allowed that the written down value is calculated. The intention of inserting the proviso apparently seems to be that if the value of the item on which depreciation is allowable is only Rs. 750 then instead of spreading the allowance over a number of year it may be better to allow the deduction in one year. In other words, if the proviso applies then the depreciation which is allowed is 100 per cent. in the year in which it is first purchased and used.
As we read section 32 it is clear that depreciations is allowed according to the rates prescribed. The depreciation is for the benefit of the assessed. The proviso gives an added benefit to the assessed, viz., that if it claims depreciation and fulfillls the conditions provided by this proviso, then instead of getting a depreciation of only 30 per cent. and the balance on the written down value in the future years, it will be entitled to claim 100 percent. depreciation in one year itself. We cannot read the proviso to mean that it excludes the right of the assessed to claim depreciation under section 32(1)(ii) if for any reason it has omitted to claim depreciation under the proviso.
The matter may be looked at from another angle. The proviso has to be construed in accordance with its terms, especially when a benefit in the form of deduction is being allowed. It is only if the assessed fulfillls all the requirements of the proviso that depreciation of 100 per cent. is allowable. The proviso requires two conditions to be fulfillled. Firstly, the item on which the depreciation is to be allowed should not cost more than Rs. 750, and secondly the item must be used for the first time in the year in which the depreciation is being claimed. If either of the two conditions is not fulfillled, the proviso will not apply. In the year 1968-69, the second condition was not fulfillled because the items were not put to use in that year for the first time. No depreciation was, thereforee, allowable under the proviso in the year 1968-69. The proviso does not, in any way, take away the right of an assessed to claim depreciation under section 32(1)(ii).
Section 32 uses the expression 'shall' both in sub-section (1) as also in the proviso. The use of the word 'shall' is a direction to the Assessing Officer to allow the deduction if the conditions contained in the section are fulfillled. It is obvious that a deduction will be allowed only if a claim is made by an assessed. Where a claim under the proviso is not made, the question of the Assessing Officer allowing deduction under the proviso does not arise. For the year 1967-68, which was the immediately preceding assessment year in which the tools were used for the first time, no benefit has been accorded to the assessed for the simple reason that the assessed did not seek the benefit. This benefit which was available to the assessed was lost. thereforee, in the subsequent year it could not invoke the provisions of the proviso to section 32(1)(ii), but the substantive right under section 32(1)(ii) was not lost. In the terms in which it is framed the proviso cannot be so construed as to oust the applicability of section 32(1)(ii) to a case like the present one. In the year 1967-68, because the proviso applied, it would have been incumbent upon the Assessing Officer to give a deduction of 100 per cent. if a claim had been made. As no claim was made in the year 1967-68 and the claim has been made in the year in question, namely, 1968-69, then because the proviso is not applicable in this year, the assessed is entitled to claim and obtain deduction under section 32(1)(ii). The intentions of the Legislature in inserting the proviso was clearly to give an added benefit to the assessed. It was not meant to deprive the assessed of the benefit which was due under section 32(1)(ii). This added benefit could be availed of only in the year in which the machinery or the plant was purchased and used, but not in the subsequent year. It is not possible for us to construe this proviso in such a way as to take away a vested right of the assessed which is enshrined in section 32(1)(ii). In our opinion, thereforee, the Tribunal was in error in holding that the assessed had, so to say, missed the bus, and was not entitled to any depreciation on the plant and machinery, in the instant case, of the value of Rs. 22,750.
As far as question No. 2 is concerned, the same has become academic. The assessed, before the Tribunal, had filed an application under sections 253 and 254 of the Income-tax Act seeking to contend that for the purposes of computing the capital employed in an industrial undertaking for the purposes of benefit under section 80J, the money which was borrowed should be included. The Income-tax Appellate Tribunal came to the conclusion that such a question could not be agitated by an application under section 253 or 254 as it was not a mistake apparent on the face of the record. The Matter has become academic for the reason that the Supreme Court in Lohia Machines Ltd. v. Union of India : [1985]152ITR308(SC) has already held that moneys which are borrowed do not form part of the expression 'capital employed'. thereforee, irrespective of the answer to question No. 2, ultimately, the assessed cannot get any benefit. This being so, it is not necessary for us to answer the said question.
As far as question No. 3 is concerned, the claim of the assessed was that in computing profits and gains for getting relief under section 80-I of the Act depreciation of the current year should not be deducted. It is not necessary for us to consider this in any great detail because the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , has already held that in determining the profits for the purpose of exemption under section 80-I of the Income-tax Act, depreciation has to be deducted. The conclusion of the Tribunal, thereforee, was correct.
The fourth question relates to the maintainability of an appeal by an assessed regarding the charge of interest under section 217 of the Act. The Income-tax Officer had sought to impose interest under section 217 for the reason that the assessed had not deposited advance tax for the year in question. In the appeal filed by the assessed, the levy of interest was sought to be challenged. The Appellate Assistant Commissioner came to the conclusion that the appeal on this ground was not maintainable. The Tribunal, purporting to follow the decisions of the Gujarat High Court and the Allahabad High Court in CIT v. Sharma Construction Co. : [1975]100ITR603(Guj) and Vidyapat Singhania v. CIT : [1977]107ITR533(All) , came to the conclusion that the appeal was not maintainable. It also referred to another decision of the Allahabad High Court in Swadeshi Cotton Mills Co. Ltd. v. CIT : [1975]101ITR621(All) . Two (sic) other decisions referred to by the Tribunal were that of the Madras High Court in the case of A.S.S.S.S. Chandrasekaran and Bros. v. CIT : [1974]96ITR711(Mad) . Following the said decisions, the Tribunal held that the assessed was not entitled to agitate the charging of interest under section 217 of the Income-tax Act in an appeal.
Neither the order of the Appellate Assistant Commissioner nor the order of the Tribunal indicates as to what was the nature of the challenge of the assessed to the levy of interest. It has been contended by learned counsel for the assessed before us that the assessed was entitled to challenge the liability to be subjected to interest.
Strong reliance has been placed by learned counsel on a decision of a Division Bench by this court in the case of CIT v. Mahabir Parshad and Sons : [1980]125ITR165(Delhi) . It was held in that case that the second part of section 246(c) of the Income-tax Act, 1961, was wide enough to permit the agitation on the issue of charging of interest under section 139 in regard to both its liability and quantum, in a valid and competent appeal against the order of assessment, though an appeal may not lie against a separate order levying interest and nothing more. It has been submitted by learned counsel for the respondent that the observations of this court in CIT v. Mahabir Parshad and Sons : [1980]125ITR165(Delhi) , regarding the maintainability of the appeal, questioning the quantum of interest which is levied, is no longer good in view of a later decision of the Supreme Court. We need not go into this controversy because, in our opinion, what has now to be applied is the decision of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT : [1986]160ITR961(SC) . The question which arose in that case was with regard to the liability to pay interest because of delay in filling the return. Interest was levied under section 215 of the Act and it was held by the Supreme Court that the levy of interest was a part of the process of assessment. It was further observed that, as the levy of interest is a part of the process of assessment, it is open to an assessed to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all. The Supreme Court approved the observations of the Karnataka High Court in the case of National Products v. CIT : [1977]108ITR935(KAR) , wherein it was held that (at page 946) : 'where penal interest is levied under section 215 by the order of assessment, the assessed may altogether deny his liability to pay such interest on the ground that he was not liable to pay advance tax at all or that the amount of advance tax determined by the Income-tax Officer as payable ought to be reduced. In either case, he denies his liability, wholly or partially, to be assessed. Similarly, where interest is levied under section 139 of the Act, the assessed may deny his liability to pay such interest on the ground that the return was not belated or that the penal provision was not attracted at all to his case. In such a case also, he denies his liability to be assessed to interest.'
The Supreme Court observed that (at page 968 of 160 ITB), 'in cases where the jurisdictional fact attracting the levy cannot be disputed, for example, that the return had been furnished under section 139 with delay, it will be a question merely of satisfying the relevant authority that there are circumstances calling for a reduction or waiver of the interest.'
From the aforesaid observations, it is clear that what can be challenged in an appeal, in relation to the levy of interest under section 217, is not the quantum of interest which is charged, but the fact that the interest itself was not leviable. The real attack has to be with regard to the payment of advance tax. If it is contended that advance tax was paid in time or a lesser amount of advance tax was payable, then on that basis challenge to the levy of interest can be raised in an appeal. If there is no dispute with regard to the non-payment of advance tax within the stipulated time then it is not possible for the assessed to raise a contention that the interest should not be levied or that a lesser amount of interest should be levied.
In the present case, unfortunately, it is not borne out from the record as to what was the precise challenge of the assessed with regard to the imposition of interest under section 217 of the Act. Mr. Bishamber Lal contends that what was sought to be contended before the Appellate Assistant Commissioner and thereafter before the Tribunal was that there had been no default in the payment of advance tax and, thereforee, interest was not liable to be imposed. In our opinion, such a contention could be raised by the assessed as it is squarely covered by the judgment of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. : [1986]160ITR961(SC) . The challenge, in such an event, would be not to the quantum of interest per se, but the challenge will be to the liability of the assessed to pay interest. To this limited extent, the imposition of interest under section 217 of the Act can be challenged.
On the facts as set out by the Tribunal in the statement of the case, we do not find any reason for disagreeing with the Tribunal as far as question No. 5 is concerned. The contention of the assessed before the Tribunal was that the assessment was time-barred. It was pleaded that originally notice under section 143(2) had been issued and assessment was completed. No adequate opportunity of hearing was granted to the assessed. The Income-tax Officer had made assessment under section 144 of the Act giving reasons as to why the ex parte assessment framed under section 144 of the Act should be set aside. This application was accepted and the assessment framed under section 144 of the Act was cancelled. Thereafter, the Income-tax Officer made a fresh assessment and passed an order under section 143(3) on January 29, 1973. It had been contended before the Tribunal that as no opportunity of hearing had been granted, the original assessment which had been framed under section 144 was null and void and a fresh assessment could not be made. There is obviously no merit in this contention. It is no doubt true that the assessment which had been framed under section 144 may have suffered from an infirmity and that gave a ground to the assessed to have the said assessment set aside on its filling an application under section 146 of the Act. Thereafter, a valid assessment had been made and there is no grievance on the part of the assessed that full opportunity to represent itself was not granted. Once an order under section 146 is passed and the assessment under section 144 is set aside, then the question of the fresh assessment made on January 29, 1973, under section 143(3) being invalid, cannot arise. This question is, thereforee, answered in favor of the Revenue.
The relevant facts with regard to question No. 6 are that before the Income-tax Appellate Tribunal the assessed sought to raise an additional ground to the effect that surtax which was levied on the assessed for the assessment year 1968-69 was allowable as a deduction for computation of its total income. The Tribunal came to the conclusion that this was an altogether new point and it could not be agitated by the assessed for the first time before it. The short question which, thereforee, arises for our consideration is whether it was open to the assessed, on the facts of the present case, to raise this additional ground before the Income-tax Appellate Tribunal for the first time. Before dealing with the two decisions of the Supreme Court, which are important and relevant, it is necessary to refer to rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963. The said rule reads as under (see [1963] 49 ITR 66 :
'11. Grounds which may be taken in appeal. - The appellant shall not, except by leave of the Tribunal, urged or be heard in support of any ground not set for the in the memorandum of appeal, but the Tribunal in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule :
Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.'
The Income-tax Appellate Tribunal, in the present case, did not refer to the aforesaid fuel. It appears to us that the said rule gives statutory recognition to the inherent power of any appellate authority or the quasi-judicial Tribunal, namely, the power to admit new grounds. The said rule 11 specifically entitled the Tribunal to allow the appellant to urge any new ground even though it is not set forth in the memorandum of appeal. In the case of Addl. CIT v. Gurjargravures P. Ltd. : [1978]111ITR1(SC) , there are some observations of the Supreme Court which seem to support the Revenue. In this case one of the grounds in appeal raised by the assessed before the Appellate Assistant Commissioner was that the Income-tax Officer had not given the benefit of section 84 of the Act to it. Such a claim had not been made before the Income-tax Officer nor had any material on record been placed in support of the claim. The Appellate Assistant Commissioner dismissed the appeal on the ground that this claim had not been made before the Income-tax Officer. The Tribunal, however, came to the conclusion that since the entire assessment was open before the Appellate Assistant Commissioner, there was no reason for it not to entertain this claim. The High Court, on a reference, upheld the decision of the Tribunal. The Division Bench of the Supreme Court, consisting of two Hon'ble judges, however, came to the conclusion (headnote of 111 ITR 1), 'that, as neither was any claim made before the Income-tax Officer regarding the relief under section 84 nor was there any material on record in support thereof, thereforee, the Tribunal was not competent to hold that the Appellate Assistant Commissioner should have entertain the question of relief under section 84 or to direct the Income-tax Officer to allow the relief.' Strong reliance has been placed on this decision by Mr. Rajendra, and it has been contended by him that as far as the Income-tax Appellate Tribunal is concerned, its jurisdiction is not coterminous with that of the Income-tax Officer. Learned counsel submits while relying upon Gurjargravures' case : [1978]111ITR1(SC) , that if the Appellate Assistant Commissioner could not permit the raising of a new ground, there was less reason or justification for the Tribunal to permit the urging of an additional or a new ground.
Apart from the fact that the Supreme Court in Gurjargravures' case : [1978]111ITR1(SC) was not concerned with the power of the Tribunal in allowing the assessed to urge an additional ground and, consequently, did not have an occasion to consider the full scope and effect of the aforesaid rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, the Supreme Court, in a later decision of a larger Bench, has struck a different note. In Jute Corporation of India Ltd. v. CIT 0044/1991 : [1991]187ITR688(SC) , the question arose whether the Appellate Assistant Commissioner had the discretion to allow a ground to be urged which has not been raised at an earlier stage before the Income-tax Officer. In that case the facts were that the assessed was engaged in jute industry, but had not claimed any deduction of purchase tax liability in its return for the assessment year 1974-75 in the belief that it was not liable to purchase tax. Later on, the assessed was assessed to purchase tax, but had disputed its liability and preferred an appeal and obtained a stay order. In an appeal filed against the assessment order the assessed sought to raise an additional ground, claiming deduction of purchase tax on the ground that the tax liability should be deducted in computing its profits in view of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) . While the Appellate Assistant Commissioner permitted the assessed to raise this additional ground, which was subsequently allowed, the Appellate Tribunal placed reliance upon the aforesaid decision of the Supreme Court in Gurjargravures' case : [1978]111ITR1(SC) , and held that the Appellate Assistant Commissioner had no jurisdiction to entertain the additional claim. The High Court, on a reference, upheld the decision of the Tribunal. The Supreme Court referred to its earlier decisions by larger Benches in CIT v. Kanpur Coal Syndicate : [1964]53ITR225(SC) and also CIT v. McMillan and Co. : [1958]33ITR182(SC) and CIT v. Shapoorji Pallonji Mistry : [1962]44ITR891(SC) , and came to the conclusion (at page 693 of 187 ITR) : 'that the power of the Appellate Commissioner was coterminous with that of the Income-tax Officer, and if that is so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income-tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise, an appellate authority while hearing the appeal against the order of a subordinate authority, has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter.'
The Supreme Court noticed the decision in Gurjargravures' case : [1978]111ITR1(SC) , and observed that the court had taken a different view in that case, and further observed that the view taken by the two judge Bench appeared to be in conflict with the view taken by the three judge Bench of that court in Kanpur Coal Syndicate's case : [1964]53ITR225(SC) which held the field. The Supreme Court did state that it did not consider it necessary to overrule the view taken in Gurjargravures' case : [1978]111ITR1(SC) , 'as, in our opinion, that decision is founded on the special facts of that case....'
The Supreme Court in Jute Corporation's case 0044/1991 : [1991]187ITR688(SC) , specifically approved the decision of the Calcutta High Court in Rai Kumar Srimal v. CIT : [1976]102ITR525(Cal) , wherein it had been held that the Appellate Assistant Commissioner was entitled to admit new grounds or evidence either suo motu or at the invitation of the parties.
In our opinion, the observations of the Supreme Court in Jute Corporation's case 0044/1991 : [1991]187ITR688(SC) are clearly applicable here. There is no dispute with regard to the fact that surtax was levied in respect of the assessment year 1968-69. The only question which was sought to be urged was a pure question of law, namely, as to whether the surtax was entitled to be deducted or not. As the appellate authority, and specifically in view of the provisions of rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, the Tribunal had the jurisdiction to allow such a contention to be raised. Normally, whenever no fresh evidence is required to be taken, we see no reason as to why an additional ground should not be entertained by the Income-tax Appellate Tribunal. This is for the reason that under article 265 of the Constitution, the State is entitled to recover or realise only that tax which is imposed in accordance with law. It is the duty of the State to see that justice is done to its citizens. thereforee, shelter should not ordinarily be taken behind procedural technicalities with a view to defeat a just claim of an assessed. We are not here observing that the claim of the assessed in the present case is justified, but all that we are trying to impress is that the contention of the assessed ought to have been allowed to be raised, especially when it was a pure question of law which was sought to be agitated and it involved no investigation into facts. We may here observe that under rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, the Tribunal has been given the power to entertain and accept additional evidence, either oral or documentary, subject to the assessed fulfillling the conditions specified in the said rule. thereforee, when additional evidence can be raised before the Tribunal under rule 29 of the said Rules, we see no reason as to why an appellant cannot, with leave of the Tribunal, urge any additional ground. We are aware of the fact that the powers of the Tribunal may not be coterminous with those of the Income-tax Officer, but it is precisely for this reason that rule 11 has been specifically inserted in the Income-tax (Appellate Tribunal) Rules, 1963, which gives power to the Appellate Tribunal to entertain additional grounds. Furthermore, as observed by the Supreme Court in Jute Corporation's case 0044/1991 : [1991]187ITR688(SC) , the appellate authority while hearing an appeal against the order of a subordinate authority, has all the power which the original authority may have in deciding the question before it.
Mr. Rajendra also drew our attention to the case Manji Dana v. CIT : [1966]60ITR582(SC) . In that case, the Tribunal did not grant leave to the assessed to raise an additional ground. The question which was for consideration before the Supreme Court was whether the Tribunal erred in not allowing the assessed to raise and argue that additional contention. The Supreme Court observed that the Tribunal was justified in refusing to allow the question to be raised, which had not been set forth in the memorandum of appeal, for the reason that the necessary evidence was not on record. In the absence of relevant evidence, the Tribunal may be justified in refusing to allow an additional ground to be urged, but such a situation is not present in this case. As already observed there is no dispute with regard to the fact that surtax in respect of the assessment year 1968-69 was levied, and the only question which arose for consideration was whether this was entitled to be deducted or not. In our opinion, this question ought to have been allowed to be agitated by the Tribunal.
From the aforesaid discussion, it will follow that question No. 1 is answered in favor of the assessed, question No. 2 has become academic while question No. 3 is answered in favor of the Revenue. Our answer to question No. 4 is that it is open to the assessed to challenge the liability to the charge of interest under section 217 of the Income-tax according to the principles laid down by the Supreme Court in Central Provinces Manganese Ore's case : [1986]160ITR961(SC) . Question No. 5 is answered in favor of the Revenue, while question No. 6 in answered in favor of the assessed.
For the assessment your 1969-70 :
Five questions of law are sought to be raised in this year. They are as follows :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the grounds regarding the computation of capital employed in the industrial undertaking and the quantum of deduction under section 80J could not be agitated before it under sections 253 and 254 of the Income-tax Act, 1961
2. Whether, on the facts and in the circumstances of the case, the assessed is entitled to deduction under section 80-I of the Income-tax Act, 1961, in respect of Rs. 1,25,602
3. Whether, on the facts and in the circumstances of the case, the depreciation of the current year is deductible in computing the profits and gains for granting relief under section 80-I of the Income-tax Act, 1961
4. Whether, on the facts and in the circumstances of the case, the assessed is entitled to depreciation under section 32(1)(ii) of the Income-tax Act, 1961, in respect of blocks and toolings of Rs. 22,750 used in the previous year relevant to the assessment year 1968-69 relevant to the assessment year 1969-70
5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessed was not entitled to take the additional ground claiming surtax levied for 1969-70 as a deduction for computation of income from business before it for the first time ?'
Questions Nos. 1, 3, 4 and 5 are identical to the questions which were raised in respect of the assessment year 1968-69 and which have been dealt with by us here in above. Arguments have been addressed only with regard to question No. 2.
The assessed had entered into an agreement with an American company called Taylor Instrument Company. One agreement was called the technical collaboration agreement, and the other was manufacturer's representative agreement. Under the first agreement, an industry was set up for the manufacture of some items. This industry was a priority industry. The Income-tax Officer computed profits and gains attributable to this industry at Rs. 31,50,735. Certain amounts aggregating to Rs. 3,81,150 had been excluded by the Income-tax Officer while computing the assessed's profits and gains, attributable to the assessed's priority industry, and relief on the said amount had not been granted. The Appellate Assistant Commissioner, however, in appeal, came to the conclusion that the assessed was entitled to the relief claimed by it. This decision was upheld by the Tribunal. In the present reference, we are not concerned with this amount. The point in issue here is that under the second agreement whereby the assessed was made the representative of the foreign company, it had received commission in respect of the stock supplied by the collaborators to the parties in India. The total sum so received was Rs. 1,25,602. Under this agreement, the assessed was the exclusive sales representative and was entitled to receive commission in respect of the sales effected by the American company in the territory of India. The Appellate Assistant Commissioner upheld the decision of the Income-tax Officer and came to the conclusion that this amount of Rs. 1,25,602 was not earned as a direct result of the business of manufacture and sale of equipment. It was also noticed that in the books of account of the assessed, the commission was not recorded as of sale, but was termed as commission on import sale. This finding was also upheld by the Tribunal. The assessed, thereforee, did not get relief under section 80-I of the Act on the said amount of Rs. 1,25,602.
It is contended by learned counsel for the assessed that it was carrying on the business if manufacture of items which fall under the category of 'priority industry'. While admitting that the amount in question related to the commission received by it on sales made by the American company to the Indian constituents, it was, however, submitted that as the said items which were sold pertained to a priority industry and after sales service was being effected by the assessed, the provisions of section 80-I became applicable. Section 80-I along with the definition of the word 'priority industry' contained in section 80B(7) shows that, on the facts of the present case, the assessed is not entitled to the relief claimed. Section 80-I is as follows :
'80-I. Deduction in respect of profits and gains from priority industries in the case of certain companies. - (1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company.
(2) This section applies to a domestic company, save in a case where such company is a company which is referred to in section 108 and has a gross total income of fifty thousand rupees or less.
(3) Where a company to which this section applies is entitled also to the deduction under section 80H, the deduction under sub-section (1) of this section shall be allowed with reference to the amount of the profits and gains attributable to the priority industry or industries as reduced by the deduction under section 80H in relation to such profits and gains.'
Section 80B(7) is as follows :
''priority industry' means the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule or the business of any hotel where such business is carried on by an Indian company and the hotel is for the time being approved in this behalf by the Central Government.'
According to section 80-I, deduction in respect of profits and gains is available to those industries to which the said section applies. The section applies to priority industries as defined in section 80B(7). This sub-section, inter alia, provides that a priority industry would mean the business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule to the Act. thereforee, the income must be generated in order to qualify for the benefit under section 80-I from the construction, manufacture or production of any one of the said items. There must be a direct nexus in the generation of income with the construction, manufacture or production by the assessed of any of the items falling in the Sixth Schedule. In the present case, in so far as items which are manufactured by the assessed, pursuant to its having entered into a collaboration agreement, the income derived there from has got the benefit under section 80-I. The present sum of Rs. 1,25,602, however, is in no way related to the activity of the assessed in the carrying out of the construction or manufacture or production of any one of the priority industry items. This sum relates to the commission received by it in respect of items manufactured or produced by the American company outside India. The intention and object of section 80-I is to give incentive and impetus to priority industries in India. If the contention of Mr. Bishamber Lal is to be accepted then it would follow that even if the assessed was not carrying on any manufacturing activity in India and even if there was no collaboration agreement like the present one, the assessed would still be entitled to claim benefit under section 80-I in respect of the commission received by it as a selling agent of a foreign seller. This was certainly not the intent of the Legislature and neither section 80-I nor section 80B can support such a contention on the part of the assessed. In our opinion, the Revenue authorities were right in holding that the income so received was not entitled to the deduction under section 80-I.
Before concluding we may note that a similar view has been expressed in Ashok Motor Ltd. v. CIT : [1961]41ITR397(Mad) and CIT v. Standard Motor Products of India Ltd. : [1962]46ITR814(Mad) by the Madras High Court and we are in respectful agreement with the same.
Question No. 2 is, thereforee, answered in favor of the Revenue. Question No. 1 for the year 1969-70 is similar to question No. 2 for the earlier year, questions Nos. 3, 4 and 5 for the year 1969-70 are similar to questions Nos. 3, 1 and 6 respectively, for the year 1968-69. For the reasons contained in our judgment for the assessment years 1968-69, questions Nos. 1 and 3, in addition to question No. 2, are answered in favor of the Revenue, while question Nos. 4 and 5 are answered in favor of the assessed.
There will be no order as to costs.