Judgment:
1. As common point arc involved in both these cross appeals, they were heard together and are disposed of by this consolidated order.
2. The assessee-company manufactures drugs, Pharmaceuticals and fine chemicals. Its main medicinal products arc marketed under well known brand name 'Vicks'. It follows accounting year ending 30th June.
3 to 6. [These paras are not reproduced here as they involve minor issues.] 7. The assessee-company was running a Mentha Research Demonstration Centre at Bilaspur in Uttar Pradesh. The raw material for manufacture of 'Vicks' products was mentha oil. This is derived from grass like peppermint plant 'Mentha Arvensis'. The assessee-company had set up a farm in 'Terai' area of Uttar Pradesh with headquarters at Bilaspur to grow Mentha Arvensis. The assessee-company encouraged cultivation of the said 'Mentha Arvensis' in the adjoining areas by other farmers.
Before the ITO, the assessee claimed weighted deduction under Section 35C of the Income-tax Act, 1961 ('the Act') as agricultural development allowance on expenditure of Rs. 8,92,246 as per revised claim. The ITO allowed weighted deduction on expenditure of Rs. 1,08,663 which was on account of supply of fertilizers ; seeds, pesticides and implements for use by the cultivators as it was covered by Section 35C(1)(b)(i).
However, in respect of expenditure of Rs. 4,12,929 on Mentha Research/Demonstration expenses, the ITO noted that the assessee had bifurcated the said expenditure as under : The ITO then went into the details of the said expenditure challenging the assessee's ad hoc bifurcation of the expenses between research and demonstration at the rate of one-fourth and three-fourth, respectively.
The ITO held that allocation at the rate of 50 per cent for research and 50 per cent for demonstration would be fair. The ITO further objected to allocation of expenditure on salary, entertainment, stationery, office expenses, postal and telephone expenses, expenditure on motor cycles and jeeps and finally held that the assessee was entitled to weighted deduction in respect of expenditure of Rs. 1,03,094 on demonstration of modern techniques or methods of agriculture which fell under Section 35C(1)(b)(ii). He, however, held that research expenses were not entitled to weighted deduction.
Similarly, he held that the assessee was not entitled to weighted deduction on distillation service expenses of Rs. 2,45,324 and expenditure of Rs. 1,25,330 claimed on scientific farming.
8. The Commissioner (Appeals), however, vide paragraph 10 accepted the assessee's claim in toto. He noted the assessee's contention that the assessec-company was the pioneer in introducing in India in 1965 cultivation of medicinal peppermint plant from which mentha oil was extracted which was used in the manufacture of 'Vicks' and other medicinal products of the assessee-company and that the assessee-company had an experiment farm at Bilaspur which had laboratory and other equipment in which technicians were employed and information was disseminated to farmers by distribution of printed literature and demonstrations were held at the assessee's research farm as also at the individual farms of the cultivators and technical adivce was rendered to the cultivators on their visit to Bilaspur or when the assessee-company's technicians visited the farms of individual cultivators and specific individual problems were looked into and solved and the information covered area starting from preparing the land, procurement of seeds, watering, manuring, pesticide treatment, weeding and the final stages of reaping the crop and its distillation.
The Commissioner (Appeals) also referred to the assessee company's directors' report for the year ending 30-6-1967, where it was observed that Mentha Research Centre at Bilaspur has been set up with the basic object of demonstration to the local farmers of proper methods of growing Mentha Arvensis and for carrying out research and experimental work in the cultivation of the crops. The Commissioner (Appeals) observed that there was no warrant for allocation of expenditure of Rs. 4,12,929 between demostration and research. He accepted the assessee's contention that the purpose of establishing the farm was only to carry out research which was based on practical difficulties faced by the cultivators and that research and demonstration were inter-related and inter-linked.
9. Before the Commissioner (Appeals), reliance was placed on the Tribunal Bombay Bench's order in S.H.K. and Co. Ltd., (Bom.) for the assessment year 1974-75 (PB 27) where expenditure of Rs. 18,038 was held entitled to Section 35C weighted deduction which was incurred on supply of fertilizers and chemicals, though a part of the said material was also used in the assessee's own farm and for the purpose of demonstration and experiments. The Tribunal held that the entire expenditure was entitled to weighted deduction because research was carried out with the object of finding out the feasibility of cultivating some of the oil-bearing plants for obtaining quality oil.
10. The Commissioner (Appeals) also accepted the assessee's contention that expenditure on distillation services was entitled to weighted deduction because distillation plant was covered by the term 'tools or implements'. Support was taken from Kanan Devan Hills Produce Co. Ltd. v. CWT [1968] 67 ITR 823 (Cal.) where a tea manufacturing company was assessed to wealth-tax and the question was whether electrical machinery, grinding machines, tube wells, etc., were tools and implements within the meaning of Section 5(1)(ix) of the Wealth-Tax Act, 1957 and the High Court held that the tools and implements of agriculture include not only all instruments used in ancient times but also those used in modern times such as bullock drawn ploughs, manually operated spades, shovels and sickles as well as power-driven tractors, earth movers, mechanism for irrigating fields and lifting water by electrically operated water pumps from deep tube wells, mechanical sprayers and insecticidal instruments, etc. The Commissioner (Appeals), accordingly, held that the assessee-company was entitled to get deduction under Section 35C on the entire expenditure of Rs. 8,92,246.
11. We have carefully considered the Commissioner (Appeals)'s order as well as the submissions of the learned counsel for the assessee and the departmental representative. We are unable to agree with the Commissioner (Appeals) in respect of the claim of weighted deduction on (a) research expenses, (b) distillation services and (c) scientific farming expenses, because, according to us, the said expenses would not be covered by Section 35C(1)(b).
12. Scientific research cannot be equated with demonstration. Research is essentially a 'systematic investigation towards increasing the sum of knowledge' (Chamber's Twentieth Century Dictionary, 1970 edn.).
'Research' as per the Shorter Oxford English Dictionary, 1978 edn.
means 'an investigation directed to the discovery of some fact by careful study of a subject ; a course of critical or scientific enquiry.' 13. As per the Living Webster Encyclopedic Dictionary, 1917 edn., 'research' means 'deligent inquiry or examination of seeking facts or principles ; an experimental investigation.' 14. Thus, research is an independent activity carried on to improve existing knowledge and is experimental investigation or scientific enquiry. We are not exactly told what research was carried on and how it was essentially with the object of demonstration or dissemination of information. Research could be for improvement in crop cultivation as also for quality control and improving the end product.
15. Research may take years to produce any tangible results. It is equally likely that even after many years research may not yield any tangible results. Results of years of research may be demonstrable in a matter of minutes, e.g., if a better type of plant or seed is produced after years of research.
16. Section 35C(1)(b)(ii), however, allows weighted deduction on 'dissemination of information on, or demonstration of, modern techniques or methods of agriculture.' Demonstration may or may not follow research. Demonstration as per Chamber's Twentieth Century Dictionary means 'to teach, expound, explain or exhibit by practical means'. 'Demonstration' as per the Living Webster Encyclopedic Dictionary is 'an exhibition of the merits and operation of a product, the act of exhibiting beyond the possibility of doubt.' 17. As per Shorter Oxford Dictionary, 'demonstration' means act of demonstrating, i.e., to describe and explain by help of specimens or by experiment.
18. Thus, demonstration can be given based on the existing knowledge, even if no research is currently carried on. Hence, demonstration and research are independent activities. It is a wide spread complaint against our science teaching in schools and colleges that teachers are not interested in research and keep on teaching and demonstrating what they learnt decades ago. The Legislature in its wisdom has not allowed weighted deduction on research and has allowed it only on demonstration of or dissemination information. We cannot, therefore, enlarge the scope of the provisions of Section 35C(1)(6)(ii) by including expenditure on 'research' under the head 'Demonstration' or 'Dissemination of information.' 19. We, however, do not approve the ITO being meticulous in holding that the assessee's bifurcation of expenses between research and demonstration needs tinkering. The assessee has followed a rough and ready method of allocating expenses between research and demonstration and there is no need to examine the allocation with a fine comb. We, accordingly, accept the assessee's claim of demonstration expenses at Rs. 2,16,449 which, according to us, is entitled to weighted deduction.
However, the research expenses of Rs. 1,96,480 are not entitled to weighted deduction.
20. Regarding expenses on distillation services of Rs. 2,45,324, we are unable to accept the assessee's contention that the said expenditure was on supply of services or facilities of 'tools and implements' for use by cultivators. The distillation plant costing many lakhs (cost not indicated) was run exclusively by the assessee-company's engineers and no cultivator was permitted to use it and/or handle it. As per the standard agreement between the assessee-company and the cultivators (PB 13), price to be paid to the cultivator is per kilogram of mentha oil obtained from herb belonging to the individual cultivator. It is true that as per Clause 4 of the agreement, the assessee was to provide to the cultivators' herb, timely and efficient distillation facility.
However, the said Clause cannot be interpreted to mean that the assessee-company supplied tools or implements 'for use by' such cultivator. Hence, conditions of Section 35C(1)(b)(i) are not satisfied. Just because cultivator is paid for his crop of peppermint not on basis of weight of peppermint plant but on its oil yield, it cannot be said that distillation plant is made available to cultivator for his use. If this argument be expanded, then a sugar-cane grower paid for his sugar cane on the basis of sugar content of the cane, can be said to be availing of and using crushing facility of sugar mill and crushing department of sugar mill can be claimed to be tools and implements used by sugar-cane grower. Similarly, a seller of milk being paid on basis of fact content of milk is not availing of fat testing facility of milk dairy.
21. Distillation plant cannot be called a 'tool or implement' for use by the cultivator despite the wide meaning given by the Calcutta High Court in Kanan Devon Hills Produce Co Ltd.'s case (supra) and CWT v.AngloAmerican Direct Tea Trading Co. Ltd. [1968] 69 ITR 260. 'Tool' of a farmer cultivating a small piece of land is essentially an 'instrument employed in manual labour for facilitating mechanical operations or any implement used by a labourer at his work', while an 'implement' similarly is an 'article assisting in carrying on manual labours' as per the Living Webster Encylopedic Dictionary.
22. As per the Shorter Oxford English Dictionary, tool is an 'instrument of manual operation, a mechanical implement for working upon something in any manual art or industry, usually one held in and operated directly by the hand but including also certain simple machines, as the lathe', Similarly, 'implement' is a 'tool or instrument'. Further, the distillation plant is not made available 'for use by' the cultivators and the distillation plant is used only by the assessce-company and no cultivator is allowed to come near it. Under these circumstances, we hold that the assessee is not entitled to weighted deduction on distillation services expenses of Rs. 2,45,324.
23. Scientific farms expenses of Rs. 1,25,033 are also not entitled to weighted deduction because the said expenses are not on dissemination of information or on demonstration of modern techniques or methods of agriculture farm runs into 200 acres and is not a small piece of land used for demonstration.
24. In the result, the revenue's appeal for the assessment year 1970-71 is partly allowed.
25 to 33. [These paras are not reproduced here as they involve minor issues].