FIRST INCOME TAX OFFICER v. RICHARDSON HINDUSTAN LTD
[Citation -1986-LL-0430-7]

Citation 1986-LL-0430-7
Appellant Name FIRST INCOME TAX OFFICER
Respondent Name RICHARDSON HINDUSTAN LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 30/04/1986
Assessment Year 1970-71 , 1972-73
Judgment View Judgment
Keyword Tags agricultural development allowance • dissemination of information • manufacturing company • research expenditure • scientific research • weighted deduction • quality control • wealth-tax act • manual labour • raw material • sugar mill • brand name • plant
Bot Summary: The ITO allowed the weighted deduction of 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. 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: Rs. Research expenses 1,96,480 Demonstration expenses 2,16,449 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 further objected to allocation of expenditure on salary, entertainment, stationery, office expenceses, 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 agricultural which fell under section 35C. He held that research expenditure were not entitled to weighted deduction. 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. 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 enlarge the scope of the provisions of section 35C by including on expenditure on 'research' under the head 'Demonstration' or 'Dissemination of information. We do not approve the ITO being meticulous in holding that t h e assessee's bifurcation of expenses between research and demonstration needs tinkering. The assessee had 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.


As common points are involved in both these cross appeals, they were heard together and are disposed of by this consolidated order. 2. assessee-company manufactures drugs, pharmaceuticals and fine chemicals. Its main medicinal products are marketed under well known brand name 'Vicks'. It follows accounting year ending 30th June. Ground No. 4 - Deduction under section 35C: 7. assessee-company was running Mentha Research Demonstration Centre at Bilaspur in Uttar Pradesh. raw material for manufacture of 'Vicks' product was mentha oil. This is derived from grass like peppermint plant 'Mentha Arvensis'. assessee-company had set up farm in 'Terai' area of Uttar Pradesh with headquarters at Bilaspur to grow Mentha Arvensis. assessee- company encouraged cultivation of said 'Mentha Arvensis' in adjoining areas by other farmers. Before ITO, assessee claimed weighted deduction under section 35C of Income-tax Act, 1961 ('the Act') as agricultural development allowance on expenditure of Rs. 8,92,246 as per revised claim. ITO allowed weighted deduction of expenditure of Rs. 1,08,663 which was on account of supply of fertilizers; seeds, pesticides and implements for use by 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, ITO noted that assessee had bifurcated said expenditure as under: Rs. Research expenses 1,96,480 Demonstration expenses 2,16,449 ITO then went into details of said expenditure challenging assessee's ad hoc bifurcation of expenses between research and demonstration at rate of one-fourth and three-fourth, respectively. ITO held that allocation at rate of 50 per cent for research and 50 per cent for demonstration would be fair. ITO further objected to allocation of expenditure on salary, entertainment, stationery, office expenceses, postal and telephone expenses, expenditure on motor cycles and jeeps and finally held that assessee was entitled to weighted deduction in respect of expenditure of Rs. 1,03,094 on demonstration of modern techniques or methods of agricultural which fell under section 35C (1) (b) (ii). He, however, held that research expenditure were not entitled to weighted deduction. Similarly, he held that 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. Commissioner (Appeals), however, vide paragraph 10 accepted assessee's claim in toto. He noted assessee's contention that assessee- company was pioneer in introducing in India in 1965 cultivation of medicinal peppermint plant from which mentha oil was extracted which was used in manufacture of 'Vicks' and other medicinal products of assessee-company and assessee-company had experiment farm at Bilaspur which had laboratory and other equipments in which technician were employed and information was disseminated to farmers by distribution of literature and demonstration were held at assessee's research farm as also at individual farms of cultivators and technical advice was rendered to cultivators on their visit to Bilaspur or when assessee-company's technician visited farms of individual farmers and specific individual problems were looked into and solved and information covered area starting from preparing land, procurement of seeds, watering, manuring, pesticide treatment, weeding and final stages of reaping crop and its distillation. Commissioner (Appeals) also referred to assessee-company's directors' report for year ending 30-6-1967, where it was observed that Mentha Research Centre at Bilaspur has been set up with basic object of demonstration to local farmers of proper methods of growing Mentha Arvensis and for carrying out research and experimental work in cultivation of crops. Commissioner (Appeals) also observed that there was no warrant for allocation of expenditure of Rs. 4,12,929 between demonstration and research. He accepted assessee's contention that purpose of establishing farm was only to carry out research which was based on practical difficulties faced by cultivators and that research and demonstration were inter-related and inter-linked. 9. Before Commissioner (Appeals), reliance was placed on Tribunal Bombay Bench's order in S. H. K. & Co. Ltd. (Bom.) for assessment year 1974-75 (PB 27) where expenditure of Rs. 18,038 was held entitled to section 3 5 C weighted deduction which was incurred on supply of fertilizers and chemicals, though part of said material was also used in assessee's own farm and for purpose of demonstration and experiments. Tribunal held that entire expenditure was entitled to weighted deduction because research was carried out with object of finding out feasibility of cultivating some of oil-bearing plants for obtaining quality oil. 10. Commissioner (Appeals) also accepted assessee's contention that expenditure on distillation services was entitled to weighted deductions because distillation plant was covered by term 'tools or implements'. Support was taken from Kanan Devan Hills Produce Co. Ltd. v. CWT [1968] 67 ITR 823 (Cal.) where tea manufacturing company was assessed to wealth- tax and question was whether electrical machinery, grinding machines, tube wells, etc., were tools and implements within meaning section 5(1) (ix) of Wealth-tax Act, 1957 and High Court held that tools and implem ents 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. Commissioner (Appeals), accordingly, held that assessee-company was entitled to get deduction under section 35C on entire expenditure of Rs. 8,92,246. 11. We have carefully considered Commissioner (Appeals)'s order as well as submissions of learned counsel for assessee and departmental representative. We are unable to agree with Commissioner (Appeals) in respect of claim of weighted deduction on (a) research expenses, (b) distillation services, and (c) scientific farming expenses, because, according to us, said expenses would not be covered by section 35C (1) (b). 12. Scientific research can not be equated with demonstration. Research is essentially 'systematic investigation towards increasing sum of knowledge' (Chamber's Twentieth Century Dictionary, 1970 edn.).'Research' as per Shorter Oxford English Dictionary, 1978 edn. means 'an investigation directed to discovery of some fact by careful study of subject; course of critical or scientific enquiry.' 13. As per Living Webster Encyclopedia Dictionary, 1977 edn., 'research' means 'deligent enquiry or examination of seeking facts or principles; am experimental investigation.' 14. Thus, research is independent activity carried on to improve existing knowledge and is experimented investigation or scientific enquiry. We are not told what research was carried on and how it was essentially with object of demonstration or dissemination of information. Research could be for improvement in crop cultivation as also for quality control and improving end product. 15. Research may take years to produce any tangible results. It is equally likely that after even after many years research may not yield any tangible results. Results of years of research may be demonstrable in matter of minutes e.g., if 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 Living Webster Encyclopedia Dictionary is 'an exhibition of merits and operation of product, act of exhibiting beyond 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 existing knowledge, even if no research is currently carried on. Hence, demonstration and research are independent activities. It is 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. 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 scope of provisions of section 35C (1) (b) (ii) by including on expenditure on 'research' under head 'Demonstration' or 'Dissemination of information.' 19. We, however, do not approve ITO being meticulous in holding that t h e assessee's bifurcation of expenses between research and demonstration needs tinkering. assessee had followed rough and ready method of allocating expenses between research and demonstration and there is no need to examine allocation with fine comb. We, accordingly, accept assessee's claim of demonstration expenses at Rs. 2,16,449 which, according to us, is entitled to weighted deduction. However, 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 assessee's contention that said expenditure was on supply of services or facilities of 'tools and implements' for use by cultivators. distillation plant costing many lakhs (cost not indicated) was run exclusively by assessee-company's engineers and no cultivator was permitted to use it and/or handle it. As per standard agreement between assessee- company and cultivators (PB 13), price to be paid to cultivators is per kilogram of mentha oil obtained herb belonging to individual cultivator. It is true that as per clause 4 of agreement, assessee was to provide cultivator's herb, timely and efficient distillation facility. However, said clause can not be interpreted to mean that assessee-company supplied tools or implements 'for use by' such cultivator. Hence, condition 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 can not be said that distillation plant is made available to cultivator for his use. If this argument be expanded, then sugar-cane grower paid for his sugar-cane on basis of expanded, then sugar-cane grower paid for his sugar-cane on basis of sugar content of 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, 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 'tool or implement' for use by cultivator despite wide meaning given by Calcutta High Court in Kanan Devan Hills Produce Co. Ltd.'s case (supra) and CWT v. Anglo-American Direct Tea Trading Co. Ltd. [1968] 69 ITR 260. 'Tool' of farmer cultivating small piece of land is essentially 'instrument employed in manual labour for facilitating mechanical operations or any implement used by labourer at his work', while 'implement' similarly is 'article assisting in carrying on manual labours' as per Living Webster Encyclopedia Dictionary. 22. As per Shorter Oxford English Dictionary, tool is 'instrument of manual operation, mechanical implement for working upon something in any manual art or industry, usually held in and operated directly by hand but including also certain simple machines, as lathe'. Similarly, 'implement' is 'tool or instrument'. Further, distillation plant is not made available 'for use by' cultivators and distillation plant is used only by assessee-company and no cultivator is allowed to come near it. Under these circumstances, we hold that 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 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 small piece of land used for demonstration. 24. In result, revenue's appeal for assessment year 1970-71 is partly allowed. *** FIRST INCOME TAX OFFICER v. RICHARDSON HINDUSTAN LTD.
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