Bombay-400 011 v. The Commissioner Of Income-Tax

K.J. IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX REFERENCE NO.315 OF 1988 Richardson Hindustan Ltd., ) Tiecicon House, Dr.E.Moses Road ) Bombay-400 011 )..Applicant Vs. The Commissioner of Income-tax ) Bombay City-V, Bombay )..Respondent ---- Mr.R.Murlidhar with Mr.Rajesh Shah i/by Rajesh Shah & Co. for the applicant. Mr.P.S.Sahadevan for the respondent. ---- Coram : F.I.Rebello & R.S.Mohite,JJ Date : 18.3.2009. Judgment :- (Per : R.S.Mohite,J) 1. The questions of law referred to this Court under Section 156(1) of the Income-tax Act are as under :- . Common question for the assessment years 1970-71 and 1972-73 :- 1. "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in rejecting the claim of the assessee-company for weighted deduction under section 35C on :- (a) expenses on research on mentha arvensis at the assessee-company’s mentha research centre ; (b) expenses on distillation services provided to the cultivators ; & (c) expenses on scientific farming. Additional question for the assessment year 1972-73 : 2 : only:- . "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the claim of deduction of sur-tax payable under the Companies (Profits) Sur-tax Act, 1964, in working out the business income was not admissible" ? 2. The relevant facts of the case are as under :- (a) The assessee is a limited company which manufactures vicks from mentha oil. Mentha oil is extracted from a plant "Mentha Arvensis". The assessee company was running a Mentha Research Demonstration Centre at Bilaspur in Utter Pradesh which had set up its own farm in Tarai area of Utter Pradesh with head quarters at Bilaspur to grow a plant "Mentha Arvensis". The assessee company also encouraged cultivation in the adjoining areas by local farmers. (b) In the course of the assessment proceedings for the assessment year 1970-71, before the Income-tax Officer, the assessee claimed a weighted deduction under Section 35-C as "agricultural development allowance" on expenditure of Rs.8,92,246/-. In his assessment order, the Income-tax officer allowed a weighted deduction only on the expenditure of Rs.1,08,663/- since the same had been incurred on supply of fertilizers, seeds, pesticides and implements for use by the cultivators, on the : 3 : footing that it was covered under Section 35C(b)(i). However, in respect of expenditure of an amount of Rs.4,12,929/- on mentha research/demonstration expenses, the Income-tax officer noted that the assessee had bifurcated the said expenditure as under :- Research expenses : Rs.1,96,480/- Demonstration expenses : Rs.2,16,449/- The Income-tax officer then went into the details of these expenditures challenging the assessee’s ad-hoc bifurcation of the expenses between research and demonstration at 1/4th and 3/4th respectively. He held that allocation @ 50% for research and 50% for demonstration would be fair and reasonable. He further objected to the allocation of expenditure on salaries, entertainment, stationery, office expenses, postal and telephone expenses, motor-cycles and jeeps. He granted a deduction in respect of expenditure of Rs.1,03,094/- on demonstration of modern techniques or methods of agriculture under Section 35C(b)(ii). He held that research expenses were not entitled to a weighted deduction and similarly the assessee was also not entitled to a weighted deduction under section 35-C on distillation services amounting to Rs.2,45,324/- or on expenditure of Rs.1,25,330/- incurred on scientific farming. : 4 : (c) For the assessment year 1972-73 the assessee demonstration would be fair and reasonable. He further objected to the allocation of expenditure on salaries, entertainment, stationery, office expenses, postal and telephone expenses, motor-cycles and jeeps. He granted a deduction in respect of expenditure of Rs.1,03,094/- on demonstration of modern techniques or methods of agriculture under Section 35C(b)(ii). He held that research expenses were not entitled to a weighted deduction and similarly the assessee was also not entitled to a weighted deduction under section 35-C on distillation services amounting to Rs.2,45,324/- or on expenditure of Rs.1,25,330/- incurred on scientific farming. : 4 : (c) For the assessment year 1972-73 the assessee company made a similar claim of weighted deduction under Section 35-C on research and farming expenses to the extent of Rs.22,76,956/-. The Income-tax officer however, allowed the claim of weighted deduction only to the extent of Rs.1,73,548/-. He also rejected the assessee’s additional claim for deduction of sur-tax liability in working out the business income for this assessment year. (d) When the assessee went up in appeal, the Commissioner of Income-tax (Appeals) while dealing with his claims for the assessment year 1970-71, accepted the same in toto and allowed the claim of the weighted deduction under Section 35-C on the entire expenditure of Rs.8,92,246/-. For the assessment year 1972-73, CIT(A) set aside the assessment and directed the Income-tax officer to examine the claim in detail with reference to the provision of section 35-C and then come to a fresh decision after giving an opportunity to the assessee company of being heard in accordance with law. CIT(A) however, upheld the disallowance by the Income-tax officer of the claim of deduction of sur-tax liability in working out the assessees business income. : 5 : (e) When the assessee came up in appeal before the ITAT, the Tribunal for the reasons mentioned in its judgment and order dated 30.4.1986, held that they were unable to agree with the CIT(A) in respect of claim of weighted deduction on (a) research expenses (b) distillation services (c) scientific farming expenses and held that these expenses could not be said to be covered under Section 35-C(b). (f) ITAT however, did not approve of the action of the Income-tax officer in tinkering with the allocation and bifurcation of expenses as made by the assessee between research and demonstration. They accordingly accepted the assessee’s claim of demonstration expenses of Rs.2,16,449/-. ITAT rejected the deduction in respect of research expenses claimed by the assessee for an amount of Rs.1,96,480/-, the expenditure on distillation services amounting to Rs.2,45,324/- as also scientific farm expenses amounting to Rs.1,25,330/-. (g) That thereafter on an application made by the assessee for a reference the above mentioned questions of law were referred to this Court. (h) Before answering the questions, it would be useful to reproduce section 35-C as it existed during the relevant assessment years with which we : 6 : are concerned. . "35C. Agricultural development allowance -(1)(a) They accordingly accepted the assessee’s claim of demonstration expenses of Rs.2,16,449/-. ITAT rejected the deduction in respect of research expenses claimed by the assessee for an amount of Rs.1,96,480/-, the expenditure on distillation services amounting to Rs.2,45,324/- as also scientific farm expenses amounting to Rs.1,25,330/-. (g) That thereafter on an application made by the assessee for a reference the above mentioned questions of law were referred to this Court. (h) Before answering the questions, it would be useful to reproduce section 35-C as it existed during the relevant assessment years with which we : 6 : are concerned. . "35C. Agricultural development allowance -(1)(a) Where any company or a co-operative society is engaged in the manufacture or processing of any article or thing which is made from, or uses in such manufacture or processing as raw materials, any product of agriculture, animai husbandry, or dairy or poultry farming, and has incurred, after the 29th day of February, 1968, whether directly or through an association or body which has been approved for the purposes of this section by the prescribed authority, any expenditure in the provision of any goods, services or facilities specified in clause (b) to a person [not being a person referred to in clause(b) of sub-section 92) of section 40A] who is a cultivator, grower or producer of such product in India, the company or co-operative society shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-fifth times the amount of such expenditure incurred during the previous year. (b) The goods, services or facilities referred to in clause (a) are the following :- (i) fertilizers, seeds, pesticides, concentrates for cattle and poultry feed, tools or implements, for use by such cultivator, grower or producer ; (ii) dissemination of information on, or demonstration of, modern techniques or methods of agriculture, animal nusbandry, or dairy or poultry farming, or advice on such techniques or methods ; (iii) such other goods, services or facilities as may be prescribed. Explanation - In computing the expenditure with reference to which deduction under this section is to be allowed, the amount, if any, received by the company or co-operative society in consideration of, or as compensation for, such goods, services or facilities shall be deducted. (2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure of the nature specified in sub-section (a), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year." : 7 : 3. Counsel appearing for the applicant first placed reliance on the judgment of the Apex Court in CIT Vs.Cynamid India Ltd., reported in 237 ITR 585. This judgment was referred to butress a limited proposition that the term "agricultural product" or "product of agriculture" is required to be construed liberally so as to include not merely the primary product as it actually grows but also a product which undergoes a simple operation so as to make it more saleable or more usable. The Supreme Court in the said case was concerned with the operation of de-husking paddy and held that this operation did not amount to an industrial or manufacturing operation but was essentially an agricultural assessment year." : 7 : 3. Counsel appearing for the applicant first placed reliance on the judgment of the Apex Court in CIT Vs.Cynamid India Ltd., reported in 237 ITR 585. This judgment was referred to butress a limited proposition that the term "agricultural product" or "product of agriculture" is required to be construed liberally so as to include not merely the primary product as it actually grows but also a product which undergoes a simple operation so as to make it more saleable or more usable. The Supreme Court in the said case was concerned with the operation of de-husking paddy and held that this operation did not amount to an industrial or manufacturing operation but was essentially an agricultural operation. That both rice and husk remained in their natural form as a result of de-husking and were covered by the term "agricultural product". In our view, the ratio in the case cited, does not have much bearing because in the present case it is not seriously in dispute that the raw material being used by the assessee company is an agricultural plant which is clearly a product of agriculture. 4. Counsel appearing for the assessee then relied upon the judgment of the Gujrat High Court in the case of Kaira Dist.Co-op.Milk Products Union Ltd., Vs. CIT reported in 253 ITR 766. In that case before the Gujrat High Court the assessee was a : 8 : union of co-operative societies engaged in manufacturing and processing of milk and milk products. The assessee incurred expenditure in the provision of goods, services or facilities viz. salary of veterinary doctors, expenditure for veterinary medicines, veterinary transport, artificial insemination and fodder growing to the persons who supplied raw milk to the assessee. The Gujrat High Court held that under Section 35-C, dissemination of information or demonstration of modern techniques or methods of agriculture, animal husbandry, dairy or poultry farming need not be of such a nature that they should benefit the recipient to adopt such method or technique on his own. It further held that the assessee undertook activities of artificial insemination, cross breeding, etc. which would result ultimately in improving the breed of the milch cattle and as a consequence improve yield both in quantity and quality resulting in better supply of raw material to the assessee. That such activities of the assessee including activities such as distributing seeds, fertilizers, etc. and providing proper irrigation facilities, undertaking levelling and developing the land which would be services as contemplated by section 35C(1)(b)(i). In such circumstances, it allowed the benefits of agricultural development allowance to the assessee. 5. In our view, however even if we give a wide : 9 : interpretation to section 35-C, yet expenses on research, distillation services and scientific farming cannot be brought into the ambit of the term "goods services or facilities" as contained in section 35-C (b) of the Income-tax Act 1961. 6. In so far as expenses on research is concerned, as rightly held by the Tribunal, research is an independent activity carried on to improve existing knowledge, which knowledge is a requirement and the basis of dissemination of information or demonstration of modern techniques contemplated by section 35-C(b)(ii). Research, as such independent activity, may or may not lead to information that can be disseminated, utilised or demonstrated. Many a times, scientific research ends in a blind alley requiring research to start afresh from scratch. We are in agreement with the findings of the ITAT in this regard and therefore, answered question-(1)(a) in the affirmative and in favour of revenue. 7. In so far as expenses on providing distillation 6. In so far as expenses on research is concerned, as rightly held by the Tribunal, research is an independent activity carried on to improve existing knowledge, which knowledge is a requirement and the basis of dissemination of information or demonstration of modern techniques contemplated by section 35-C(b)(ii). Research, as such independent activity, may or may not lead to information that can be disseminated, utilised or demonstrated. Many a times, scientific research ends in a blind alley requiring research to start afresh from scratch. We are in agreement with the findings of the ITAT in this regard and therefore, answered question-(1)(a) in the affirmative and in favour of revenue. 7. In so far as expenses on providing distillation services, it was contended by the Counsel that the distillation plant must be interpreted to be a "tool or implement" within the meaning of these terms as contained in Section 35-C(b)(ii), by giving a wider meaning to these terms. It was however, conceded that the distillation plant was not being used directly by cultivators and it was being operated by : 10 : expert operators engaged by the assessee. We find that the distillation process was carried on firstly for determining the quantum of mentha oil in the crops grown by cultivators to further enable the assessee to pay the cultivator his dues in accordance with the quantum as ascertained. However, main purpose of the distillation was commercial in nature and was to extract the mentha oil for use as raw material in manufacturing the final product "Vicks". The use of the distillation plant was therefore, not by the cultivator but by the assessee. We therefore, concur with the view of the ITAT that the claim for weighted deduction under Section 35-C in respect of expenses for a distillation service would not be allowable to the assessee. Question 1(b) is therefore, answered in the affirmative and in favour of revenue. 8. As regards the expenses on scientific farming an attempt was made to contend that the scientific farming was a part of a demonstration of modern techniques or methods of agriculture. We however, find no material to support this contention. The farm in question is a huge expanse of land which is owned and used by the assessee. The farming activity thereon is solely carried out by the assessee without the aid of the local farmers. A mere growing of plants on such a farm albit by using scientific methods, in our view, cannot amount to : 11 : either dissemination of information or demonstration of modern techniques/methods of agriculture. We are in agreement with the findings of the ITAT in this regard. Question 1(c) must therefore, also be answered in the affirmative and against the assessee. 9. As regards the additional question for the A.Y.1972-73, both Counsel agree that the same has been answered by the Supreme Court in the case of Smith Kline and French (India) & Ors. V/s.CITreported in 219 ITR 581 against the assessee. On Smith Kline and French (India) & Ors. V/s.CIT reported in 219 ITR 581 reported in 219 ITR 581 against the assessee. On perusing the judgment, we find that the question has indeed been answered against the assessee. The question is therefore, answered in the affirmative and against the assessee. 10. In view of the answers as given above, the reference is disposed off with no orders as to costs. (R.S.Mohite,J) (F.I.Rebello,J)