1998 P T D 735

[221 I T R 215]

[Bombay High Court (India)]

Before Dr. B. P. Saraf and M.L. Dudhat, JJ

ASSOCIATED CEMENT COMPANIES LTD.

versus

COMMISSIONER OF INCOME-TAX

Income-tax Reference No.206 of 1982, decided on 08/12/1995.

(a) Income-tax---

----Special deduction---Royalty, commission or fees received from foreign Government of foreign enterprise---Scope of S.80-O---Turnkey project for establishment of cement company in a foreign country---Amount paid under contract obviously included fees for specialised industrial knowledge --- Non-specification of amount attributable to use of specialised industrial knowledge---Claim under S.80-O could not be disallowed---Indian Income Tax Act, 1961, S. 80-0.

It is clear from a plain reading of section 80-0 of the Income Tax Act, 1961, that where the gross total income of an assessee includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, under an agreement approved by the Board in this behalf, the assessee shall be entitled to a deduction of the whole of the income so received in or brought into India in computing the total income of the assessee on fulfilment of the conditions laid down in the said section. Contracts of the type envisaged by section 80-0 are usually very complex ones and cover a multitude of obligation and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contract. The mere fact that contract did not specifically assign the nomenclature mentioned in section 80-0 to the payments made to the assessee could not be a factor to reject the claim of the assessee for deduction under section 80-0. Similarly, the merely fact that the assessee was carrying on the business as engineer and contractor and the receipts flowed to it in the course of its business as such would not necessarily preclude relief under section 80-0, if they could be brought within the categories of receipts mentioned in the section.

(b) Income-tax---

----Special deduction---Royalty, commission or fees received from foreign Government or foreign enterprise---Condition precedent for special deduction under S.80-O---Income must be brought into India---Income utilised in manner permitted by R.B.I.---Income deemed to be brought into India-- Indian Income Tax Act, 1961, S.80-O.

The condition precedent to the application of section 80-0 is that the income should be brought into India. The, Explanation to subsection (1) of section 80-0 provides that the provisions of the Explanation to section 80-N shall apply for the purpose of this section as they apply for the purposes of that section. The Explanation to section 80-N was inserted by the Finance Act, 1974, with retrospective effect from April 1, 1969. Clause (ii) of the Explanation creates a legal fiction and provides that any income used by the assessee outside India in the manner permitted by the Reserve Bank of India shall be deemed to have been brought into India in accordance with the law for the time being in force for regulating payments and dealings in foreign exchange on the date on which such permission is given.

The assessee entered into a contract with a company in Kuwait for construction of a cement factory at Kuwait. The agreement was dated April 8, 1970. According to the agreement, the assessee was entitled to 25,48,000 U.S. dollars and under the contract, the assessee was required to undertake supply, delivery, construction, erection, testing and handing over the whole of the works as set forth in the contract documents within 18 calendar months from the date of signing of the contract in accordance with the specifications set out therein. The assessee made an application to the Central Government on July 8, 1970, for approval of the contract under section 80-0 of the Act which was given. In the previous year relevant to the assessment year 1972-73, the assessee-company received a sum of Rs.3,36,000 from the company in Kuwait and for the first time it claimed deduction under section 80-0 of the Act in respect of this amount. According to the assessee, this sum was received by it by way of fees for preparing designs of the proposed cement plant. The Income-tax Officer allowed deduction under section 80-0 of the Act as claimed by the assessee in respect of the above receipt. The assessee received further sums of Rs.62,27,017 and Rs.22,63,000 in the assessment years 1972-73 and 1973-74 from the company in Kuw4it in accordance with the terms of the contract. The assessee claimed deduction under section 80-0 of the Act. The claim was rejected by the Income-tax Officer and the Tribunal. On a reference:

Held, that though in the contract there was no specific mention of the amount attributable to any of the services falling under section 80-0 of the Act, it was obvious that the consideration was payable for a contract which was a contract for a turnkey project and not a contract of the ordinary type. In the execution of the said contract, the assessee was undoubtedly required to use very specialised industrial, commercial and scientific knowledge, experience and skill and to render highly sophisticated technical services. In such a case, the claim of the assessee for deduction under section 80-0 of the Act cannot be disallowed on the ground that in the contract there is no bifurcation or apportionment of the amount attributable to the services rendered by the assessee which fall under section 80-0 of the Act. Hence, the claim of the assessee for deduction under section 80-0 of the Act required reconsideration. It was not possible for the High Court to decide it in this reference in the absence of a factual finding whether the consideration received by the assessee or any part of it was attributable to any of the services or information, etc. specified under section 80-0 of the Act.

Continental Construction Ltd. v. CIT (1992) 195 ITR 81 (SC) applied.

The scope and ambit of the expression "for the purpose of the business" in section 37 of the Act is very wide. But, however, wide the meaning of this expression may be, its limits are implicit in it. The purpose shall be "for the purposes of business", that is to say, that the expenditure incurred shall be "for the carrying on of the business" and the assessee shall incur it in its capacity "as a person carrying on the business "If an assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year, it cannot claim allowance under section 37 of the Income Tax Act, 1961, of an outgoing attributable to the business which is closed against the income of its other businesses in that year.

(c) Income-tax---

----Business expenditure---General principles---One of the businesses of assessee in Pakistan sold to Pakistan Government in 1965---Expenditure incurred in litigation for determination of sale price in accounting year relevant to assessment year 1972-73---Not deductible---Indian Income Tax Act, 1961, S.37.

The assessee-company had factories in the territory of West Pakistan which were sold by it to the Government of West Pakistan in March, 1965. According to the assessee, the sale price was Rs.326 lakhs. The Government of West Pakistan, however, determined the same at Rs.278.64 lakhs. The Government of Pakistan filed a suit. The assessee contested the above suit. An expenditure of Rs.4,84,742 was incurred by the assessee as legal expenses in connection with the above litigation in Pakistan. The assessee claimed deduction of this expenditure in the computation of its income for the assessment year 1972-73. The Income-tax Officer rejected this claim of the assessee. The order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. On a reference:

Held, that the amount was not deductible because the business in West Pakistan, which had been sold by the assessee years back, was neither a "business" carried on by the assessee nor was it a part of the other business carried on by the assessee.

L.M. Chhabda & Sons v. CIT (1967) 65 ITR 638 (SC) fol.

(d) Income-tax---

----Development rebate---Addition to water works---Development rebate allowable on entire expenditure including civil works---Indian Income Tax Act, 1961.

The assessee claimed development rebate in respect of a sum of Rs.18,30,944 spent towards the cost of additions made to the existing water works in the assessment year 1973-74. The Income-tax Officer allowed development rebate only on the cost of pumps, electrical items and the cost of pipes and disallowed the claim in respect of amounts spent on civil works. The Appellate Assistant Commissioner allowed the claim of the assessee for development rebate on the full amount. The Tribunal affirmed the order of the Income-tax Officer and set aside the order of the Appellate Assistant Commissioner: On a reference:

Held, that civil works were an integral part of the water works, because, without the civil works, pipes and pumps could not perform the function of the water works. The expenditure incurred by the assessee on the water works as a whole including that on the civil works was, therefore, to be treated as a part and parcel of the expenditure incurred on the water works and development rebate had to be given on the entire amount.

CIT v. Mazagaon Dock Ltd. (1991) 191 ITR 460 (Bom.) applied.

(e) Income-tax---

Export markets development allowance---Weighted deduction ---Travel- Expenditure on travel in India not entitled to weighted deduction---Indian Income Tax Act, 1961, S.35-B.

Expenditure incurred by the assessee in India on account of travelling did not qualify for relief under section 35-B(1)(b)(iii) of the Act;

Daryani (M.H.) v. CIT (1993) 202 ITR 731 (Bom.) fol.

(f) Income-tax---

----Depreciation---Scientific research---Assets purchased for scientific research---Deduction of capital expenditure in earlier years---Depreciation not allowable on cost/written down value of such assets---Indian Income Tax Act, 1961, S.32.

Assessee was not entitled to depreciation allowance in its assessments for the assessment years 1972-73 and 1973-74 on the cost or written down value of the assets purchased by it in the earlier years for scientific research and used by it for scientific research in these two years when deduction for the relevant capital expenditure had been fully followed in the corresponding assessments for earlier years.

Escorts Ltd. v. Union of India (1993) 199 ITR 43 (SC) fol.

CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) and Paraksh Cotton Mills (P.) Ltd. v. CIT (1993) 201 ITR 684 (SC) ref.

P.F. Kaka instructed by Payne & Co. for the Assessee.

Dr. V. Balasubramaniam with. P.S. Jetley instructed by H.D. Rathod for the Commissioner.

JUDGMENT

DR. B. P. SARAF, J.---By this reference under section 256(I) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal, Bombay Bench A, Bombay, has referred the following questions of law to this Court for opinion:

At the instance of the assessee

"(1) Whether the assessee was entitled to a deduction under section 80-0 of the sums of Rs.62,27,077 and Rs.22,63,000 in its assessment for the assessment years 1972-73 and 1973-74?

(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction for the legal expenses of Rs.4,84,742 in its assessment for 1972-73?

(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly disallowed the claim of the assessee for development rebate under section 33(6) on the cost of the water works in respect of the assessment for the assessment year 1973-74?

(4) Whether, on the facts and in the circumstances of the case, deduction was allowable as revenue expenditure in the assessment for gte assessment year 1973-74 for the expenditure of Rs. 9,473 incurred by the assessee for travelling by Shri Joshi?

(5) Whether, on the facts and in the circumstances of the case, deduction was allowable as revenue expenditure in the assessment for 1973-74 for the expenditure of Rs. 28,262 incurred by the assessee for travelling by S/Shri S. R. Vakil and R. M. Khatau?

(6) Whether, the expenditure of Rs.3,16,552 incurred by the assessee in India on account of travelling qualifies for relief under section 35 B(1)(b)(iii) in its assessment for 1973-74 ?"

At the instance of the Commissioner

(7) Whether the assessee is entitled to depreciation allowance in its assessments for the assessment years 1972-73 and 1973-74 on the cost- or written down value of the assets purchased by it in the earlier years for scientific research and used by it for scientific research in these two years, though deduction for the relevant capital expenditure had been fully allowed in the corresponding assessments for earlier years?"

The questions referred to us have been numbered consecutively for the sake of convenience.

The controversy in the first question pertains to rejection of claims of the assessee for deduction under section 80-0 of the Income-tax Act, 1961 ("the Act"), for the assessment years 1972-73 and 1973-74. The relevant facts pertaining to the said question are as follows:

The assessee entered into a contract with Kuwait Cement Company for construction of a cement factory at Kuwait. The agreement was dated April 8, 1970. According to the agreement, the assessee was entitled to 9,10,000 Kuwait Dinars as the contract price convertible into U.S. dollars at the rate of 2.8 one Kuwait dinar. The contract price equivalent to freely convertible U. S. dollars, thus was 25,48,000 U. S. dollars. The assessee was described in the contract as contractor and the Kuwait Cement Company as the purchaser. Under the contract, the assessee was required to undertake supply, delivery, construction, erection, testing and handing over the whole of the works as set forth in the contract documents within 18 calendar months from the date of signing of the contract in accordance with the specifications set out therein.

The assessee made an application to the Central Government on July 8, 1970, for approval of the contract under section 80-0 of the Act which, it appears from the letter of the Government of India in the Ministry of Foreign Trade, dated September 30, 1970, addressed to the assessee, was granted by the Government. In the previous year relevant to the assessment year 1972-73, the assessee-company received a sum of Rs.3,36,000 from the Kuwait Cement Company and for the first time it claimed deduction under section 80-0 of the Act in respect of this amount. According to the assessee, this sum was received by it by way of fees for preparing designs of the proposed cement plant. The Income-tax Officer allowed deduction under section 80-0 of the Act as claimed by the assessee in respect of the above receipt. The assessee received further sums of Rs.62,27,077 and Rs.22,63,000 in the assessment years 1972-73 and 1973-74 from the Kuwait Cement Company in accordance with the terms of the contract. The assessee claimed deduction under section 80-0 in respect of these two receipts. It did so by filing a revised return for the assessment year 1972-73 and by making the claim in the original return for the assessment year 1973-74. The claim of the assessee for deduction under section 80-0 of the Act in respect of the above receipts was rejected by the Income-tax Officer on the ground that no profit or income arose to the assessee from the above receipts. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the claim of the assessee on the ground that the receipts in question did not come in any convertible foreign exchange in India as required by section 80-0 (as amended with retrospective effect from April 1, 1972). The Appellate Assistant Commissioner rejected the claim of the assessee also on the ground that the construction of the cement factory including civil and engineering works did not result in use of any technical knowledge and skill which was a pre-condition for deduction under section 80-0. The Appellate Assistant Commissioner was also of the opinion that the receipts in question were not royalty, commission, fees or any similar payments and were not related to use of any patent, invention, model, designs, etc., as required by the provisions of Section 80-0 of the Act.

Against the above order of the Appellate Assistant Commissioner, the assessee appealed to the Income-tax Appellate Tribunal ("the Tribunal"). The Tribunal observed that there was nothing to show that the receipts in question (apart from the sum of Rs.3,36,000 which the Department itself accepted as being receipt for drawings and designs and qualified for relief under section 80-0), included any sum or receipts by way of "royalty, commission, fees or any similar payments received by the assessee .... " in consideration for the use outside India of any patent, invention, model, design, secret, formula or process or similar property to right or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided by the assessee or in consideration of technical services rendered or agreed to be rendered outside India by the assessee. According to the Tribunal, the receipts came in as a result of execution of a contract for the installation of a cement grinding and packing plant and. the construction of the factory including civil and engineering construction as a result of a turnkey project. The Tribunal observed that in the first place, the receipts did not partake of the character of royalty, commission, fees or any similar payment. In the second place, the receipts had not come in consideration for the use of any patent, invention, model, design, secret formula or process or similar property right or information concerning industrial, commercial or scientific knowledge, experience or skill made available by the assessee to the Kuwait Cement Company. In the third place, according to the Tribunal it was not a receipt in consideration of any technical services rendered or to be rendered by the assessee to the Kuwait Company. The Tribunal also observed that the approval of the agreement by the Government by itself did not clinch the issue in favour of the assessee because the approval was subject to the relevant receipts or income fulfilling the conditions prescribed under section 80-0 of the Act. The Tribunal held that the receipts in question were merely for execution of a civil and engineering contract and not in the nature of royalty, commission, etc., for supply of technical know-how, etc., and there was no profit or income from these receipts. The Tribunal, however, observed that the assessee had received the amount in India in convertible foreign exchange by virtue of the legal fiction contained in section 80-0 itself. In view of its opinion in regard to the nature of the services rendered by the assessee and the nature of the receipts, the Tribunal held that the assessee-company had failed to fulfil the conditions prescribed under section 80-0 of the Act in respect of the amounts in question and hence was not entitled to deduction under section 80-0 of the Act in respect of the said amounts.

Aggrieved by the above decision of the Tribunal, the assessee sought for reference of the question of law arising out of the above finding to this Court, which the Tribunal has done by referring question No. 1.

Mr. P. F. Kaka, learned counsel for the assessee, submits that the Tribunal committed a manifest error of law in holding that the payments in the instant case having been received by the assessee in the execution of a turnkey project, the receipts would partake of the character of royalty, commission, fees or any similar payment. Counsel submits that the project undertaken by the assessee being a turnkey project, the contract in question was not an ordinary contract and the assessee had to make use of its commercial, industrial and scientific knowledge, experience and skill in the execution of the same. According to counsel, the assessee-company had rendered substantial technical services in the execution of the said contract and hence, it was entitled to deduction under section 80-0 of the Act in respect of the receipts on account of such services. It is stated by learned counsel that the fact whether there was loss or profit in carrying out the project is not a relevant consideration in deciding the claim for deduction under section 80-0 of the Act. Counsel submits that the assessee is entitled to deduction under section 80-0 if the receipt in question or any part of it meets the description of the receipts mentioned in- section 80-0 of the Act. In support of this contention reliance is placed on the decision of the Supreme Court in Continental Construction Ltd. v. CIT (1992) 195 ITR 81.

We have considered the above submissions. We have carefully perused. the contract in question. It appears from a reading of the contract as a whole that though in the contract there is no specific mention of the amount attributable to any of the services falling under section 80-0 of the Act, it is obvious that the consideration was payable for a contract which is a contract for a turnkey project and not a contract of ordinary type. In the execution of the said contract, the assessee is undoubtedly required to use very specialised industrial, commercial and scientific knowledge, experience and skill and to render highly sophisticated technical services. In that view of the matter, in such a case, the claim of the assessee for deduction under section 80-0 of the Act cannot be disallowed on the ground that in the contract there is no bifurcation or apportionment of the amount attributable to the services rendered by the assessee which fall under section 80-0 of the Act.

Section 80-0, as it stood at the material time, read as follows

"80 O Deduction in respect of royalties etc: from certain foreign enterprises.---(1) Where the gross total income of an assessee, being an Indian company, includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design; secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, under an agreement approved by the Board in this behalf (and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealing in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of the whole of the income so received in, or brought into, India) in computing the total income of the assessee:

Provided that, the application for the approval of the agreement referred to in this subsection is made to the Board before the 1st day of October of the assessment year in relation to which the approval is first sought:

Provided further, that approval of the Board shall not be necessary in the case of any such agreement which has been approved for the purposes of the deduction under this section by the Central Government before the 1st day of April, 1972, and every application for such approval of any such agreement pending with the Central Government immediately before the day shall stand transferred to the Board for disposal.

Explanation.---The, provisions of the Explanation to section 80-N shall apply for the purposes of this section as they apply for the purposes of that section. "

It is clear from a plain reading of this section that where the gross total income of an assessee includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or-in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, under an agreement approved by the Board in this behalf, the assessee shall be entitled to a deduction of the whole of the income so received in or brought into India in computing the total income of the assessee on fulfilment of the conditions laid down in the said section.

So far as the approval of the Board is concerned, there is no dispute that the agreement in this case was approved by the Board for the purpose of this section. The claim of the assessee for deduction under section 80-O of the Act was rejected on two grounds. First, that the receipts in question were not receipts for services, etc., of the type specified in section 80-0 of the Act. Second, though it was received in convertible foreign exchange outside India, it was not brought into India by the assessee as required by the above section. We have considered both these two grounds. So far as the secondground is concerned, in our view, rejection on that ground is erroneous in view of the Explanation to subsection (1) of section 80-0 which provides that the provisions of the Explanation to section 80-N shall apply for the purpose of this section as they apply for the purposes in that section. The Explanation to section 80-N which was inserted by the Finance, Act, 1974, with retrospective effect from April 1, 1969, reads:

"80-N. Deduction in respect of dividends received from certain foreign companies.

Explanation. ---For the purpose of this section---

(i) 'convertible foreign exchange' means foreign exchange which is for the time being created by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealings in foreign exchange;

(ii) an income used b the assessee outside India in the manner permitted by the Reserve Bank of India shall be deemed to have been brought into India in accordance with the law for the time being in force for regulating payments and dealings in foreign exchange on the date on which such permission is given.

Clause (ii) of the above Explanation thus creates a legal fiction and provides that any income used by the assessee outside India in the manner permitted by the Reserve Bank of India shall be deemed to have been brought into India in accordance with the law for the time being in force for regulating payments and dealings in foreign exchange, on the date on which such permission is given. In the case before us, there is no controversy about the fact that the amounts received by the assessee in the foreign country on account of the turnkey project in question were received in convertible foreign exchange and the said amounts had been used by the assessee outside India with the permission of the Reserve Bank of India in the manner set out in the permission of the Reserve Bank. In that view of the matter, the claim of the assessee for deduction under section 80-0 cannot be rejected on that ground.

The only question that remains to be decided is whether the receipts in question or any part of it can be held to be royalty, commission, fees or any similar payment received by the assessee in consideration for the use outside India of information concerning industrial, commercial or scientific knowledge, experience or skill, etc., or in consideration of technical services rendered by the assessee. There is no finding of the Tribunal or any of the authorities below in this regard except a casual observation that the project in question being a turnkey project and there being no specific clause in the agreement in question to provide for payment for any such services, the receipts would not partake of the character of royalty, fees, commission, etc. We have given our careful consideration to the question whether non -specification of a particular amount as consideration for such services would, by itself, disentitle the assessee to deduction under section 80-O. On a careful perusal of section 80-O and the well-settled legal principles, we are of the clear opinion that the claim for deduction under section 80-0 cannot be rejected on that ground. The mere fact that the contract did not specifically assign the nomenclature mentioned in section 80-O to the payments made to the assessee could not be a factor to reject the claim of the assessee for deduction under section 80-O. Similarly, the mere fact that the assessee was carrying on business as engineers and contractors and the receipts flowed to it in the course of its business as such would not necessarily preclude relief under section 80-O, if they could be brought within the categories of receipts mentioned in the section. The contract executed by the assessee was not an ordinary contract, it was a contract for execution of a turnkey project. Obviously in such cases, though it is a single project, it comprises various elements including elements referred to in section 80-0. As observed by the Supreme Court in Continental Construction Ltd. v. CIT (1992) 195 ITR 81, there is no antithesis between the categories of income specified in section 80-0 and the profits and gains of a business. Contracts of the type envisaged by section 80-0 are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile of the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contract. For the purpose of income-tax,

the' principle of apportionment has always been applied in different contexts. Consolidated receipts and expenses have always been considered apportionable in the contexts: (a) of the capital and revenue constituents comprised in them; (b) portions of expenditure attributable to business and non-business purposes; (c) of places of accrual or arisal; and (d) of agricultural and non-agricultural elements in such receipts or payments. It was held by the Supreme Court in Continental Construction Ltd.'s case (1992) 195 ITR 81, that once a contract is approved by the Board having regard to the nature of the receipts flowing therefrom, the assessee is entitled to seek deduction under section 80-0 in respect of the receipts under the contract "the consideration for which is traceable to the three ingredients" irrespective of the assessment year in which the receipts fall for assessment. The ratio of the above decision of the Supreme Court is squarely applicable to the facts of the present case and following the same, it is clear that the assessee is entitled to get deduction under section 80-0 if he can satisfy the authorities that the amounts received by him on account of a contract approved under section 80-0 or any part of it is legitimately attributable to any information or services, etc., specified under section 80-0 of the Act.

Reference may also be made in this connection to a recent decision of the Supreme Court in Prakash Cotton Mills (P.) Ltd. v. CIT (1993) 201 ITR 684. In that case, dealing with the controversy whether interest payable for delayed payment of sales tax can be apportioned as damages or penalty or interest for the purposes of deduction under section 37(1) of the Act, the Supreme Court held that wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities have to bifurcate the two components of the impost and give deduction of that component which is compensatory in nature and refuse to give deduction of that component which is penal in nature. This decision of the Supreme Court is also an authority for the proposition that the principles of apportionment can be applied in different contexts for the purposes of Income-tax.

In view of the above decisions of the Supreme Court, we are of the clear opinion that the claim of the assesee in the instant case for deduction under section 80-O of the Act requires reconsideration. It is not possible for us to decide it in this reference in the absence of a factual finding whether the consideration received by the assessee or any part of it is attributable to any of the services or informations, etc., specified under section 80-0. We, therefore, remand the matter to the Tribunal to decide the claim of the assessee for deduction under section 80-0 of the Act afresh in the light of our above observations and the ratio of the decisions of the Supreme Court in Continental Construction Ltd.'s case (1992) 195 ITR 81 and Prakash Cotton Mills (P.) Ltd.'s case (1993) 201 ITR 684, after giving opportunity to the assessee to adduce or bring on record any evidence or material it may like to adduce or produce in support of its contention that the receipts in question or any part of it, is attributable to any of the activities specified under section 80-0 of the Act. The controversy in the second question pertains to the rejection of claim of the assessee for deduction of a sum of Rs.4,84,742 incurred by it in Pakistan by way of legal expenses. T. he material facts pertaining to the above claim are as follows:

The asssessee-company had factories in the territory of West Pakistan which were sold by it to the Government of West Pakistan in March, 1965. According to the assessee, the sale price was Rs.32b lakhs. The Government of West Pakistan, however, determined the same at Rs.278.64 lakhs. The assessee-company protested against the above determination by the Government of West Pakistan as according to it, it was contrary to the terms and conditions of the agreement entered into with the Government of West Pakistan. The Government of West Pakistan thereupon filed a suit in the Court of the Senior Civil Judge, Lahore, seeking a declaration that a sum of Rs.278.64 lakhs only was payable to the assessee as consideration for sale of the undertaking by the assessee to it. The assessee contested the above suit. An expenditure of Rs.4,84,742 was incurred by the assessee as legal expenses in connection with the above litigation in Pakistan. The assessee claimed deduction of this expenditure in the commutation of its income for the assessment year 1972-73. The Income-tax Officer rejected this claim of the assessee. The order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal ("the Tribunal"). The Tribunal held that the Income-tax Officer was justified in rejecting the claim of the assessee for deduction of the above amount in computing the income of the assessee as it was not an expenditure incurred for the purpose of the business of the assessee. The assessee sought for reference of the question of law arising out of the rejection of the above claim of the assessee by the Tribunal. The Tribunal has, accordingly, referred question No.2 for our opinion.

Learned counsel for the assessee submits that the Tribunal erred in law in holding that the expenditure in question was not an expenditure incurred for the purpose of the business of the assessee. He submits that the expenditure of Rs.4,84,742 was incurred by the assessee for recovering the amount due to it from the Government of West Pakistan as consideration for the sale of its business in West Pakistan in the year 1965. The litigation expenditure incurred by the assessee in this case, according to learned counsel for the assessee, is an expenditure incurred for the purpose of the business. A number of decisions of different Courts dealing with the deductibility of expenditure were referred to in support of his contention. Dr. Balasubramaniam, learned counsel for the Revenue, on the other hand, supports the finding of the Tribunal and submits that the expenditure in question is not an expenditure incurred by the assessee for the purpose of its business. According to him, this is an expenditure incurred in connection with the business which had been sold long back in the year 1965 and in connection with the litigation which had arisen in connection with the determination of the sale price of such business.

Learned counsel for the assessee, in reply, submits that the main business of the assessee being manufacture and sale of cement, sale of its business in Pakistan, which comprised cement factories, cannot be held to be a discontinuation of business and any expenditure incurred for the recovery of the sale proceeds of the said business in Pakistan would be expenditure for the purpose of the business of the assessee.

We have carefully considered the rival submissions. The claim for deduction in this case is based on section 37 of the Act, which provides that any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession", the only exception being capital expenditure or personal expenditure of the assessee. The question that arises for consideration is whether the expenditure in question is incurred wholly and exclusively for the purpose of the business of the assessee. The scope and ambit of the expression "for the purposes of the business" is very wide. It may take within its ambit not only the expenditure incurred on the day-to-day running of a business but also on the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title. It may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence business or for the carrying on of a business. Even expenditure incurred in connection with acts incidental to the carrying on of the business would fall within the ambit of this expression. But as held by the Supreme Court in CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140, however, wide the meaning of this expression may be, its limits are implicit in it. The purpose shall be "for the purposes of the business", that is to say, that the expenditure incurred shall be "for the carrying on of the business" and the assessee shall incur it in its capacity "as a person carrying on the business". In the instant case, the expenditure has been incurred by the assessee in connection with one of its business ventures in West Pakistan which had been sold by it to the Government of Pakistan long back in the year 1965. The question is whether the expenditure incurred in litigation for determination of the sale price of such business, which is closed, can be allowed as a deduction under section 37 of the Act against the income of; other business of the assessee in that year. We are of the clear opinion that no such deduction is permissible under section 37 of the Act. The reason is obvious. The business in West Pakistan, which had been sold by the assessee years back, was neither a "business" carried on by the assessee nor was it a part of the other business carried on by the assessee. The submission of counsel that because the assessee continued to carry on the business of manufacture and sale of cement, expenditure incurred by it in litigation for recovery of the sale price of its factories in West Pakistan which were sold to the Government of West Pakistan would be expenditure for the purposes of its businesses is too far fetched and untenable in law. It is well-settled that if an assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year, he cannot claim allowance under section 37 of the Income Tax Act, 1961, of an outgoing attributable to the business which is closed against the income of his other business in that year.

Reference may be made in this connection to the decision of the Supreme Court in LM. Chhabda & Sons v. CIT (1967) 65 ITR 638. The assessee in that case was carrying on the business of exhibiting cinematograph films in Ahmedabad, and in Bombay. The lease in respect of one cinema theatre, the Prakash Talkies, expired in 1952 and thereafter the landlord filed a suit in ejectment against the assessee and obtained a decree for possession and an order for payment of mesne profits. Out of the mense profits paid by the assessee, they claimed deduction of the sum of Rs.92,240 in determining their business income for the calendar year 1954 relevant to the assessment year 1955-56. The Income-tax Officer disallowed the claim on the ground that the business of Prakash Talkies was not carried on by the assessee during 1954. The Tribunal affirmed the disallowance holding that the cinema theatres acquired by the assessee from time to time on lease or otherwise were run independently of one another and with separate identifiable books and that the opening of a new theatre or closure of another did not affect the working of the remaining theatres. On a reference, the High Court also held that the amount in question was not allowable as a deduction in determining the business income of the assessee for the assessment year 1955-56. The assessee appealed to the Supreme Court. Before the Supreme Court, it was contended on behalf of the assessee in support of its claim for deduction of expenditure on account of the closed cinema hall from the income of the other business that the assessee was conducting cinema theatres in Ahmedabad and Bombay and the result of the gains of the different ventures was entered in the accounts maintained at the head office. The Supreme Court rejected the claim of the assessee arid dismissed the appeal. While doing so, it was observed (page 642):

"It is true that the appellants were conducting cinema theatres in Ahmedabad and Bombay, and the result of the accounts of the different ventures was entered in the accounts maintained at the head office, but from that circumstance no inference necessarily arises that the exhibition of films in different theatres constituted the same business. It was for the appellants to establish that different ventures constitute parts of the same business".

The ratio of this decision in our view, squarely applies to the facts of the present case and following the same, we answer question No.2 in the negative and in favour of the Revenue.

We now turn to question No.3. The dispute therein pertains to disallowance of a part of the claim of the assessee for development rebate under section 33(6) of the Act in respect of cost of the water works in the assessment for the assessment year 1973-74. The facts relevant for determination of the above controversy are as follows:

The assessee claimed development rebate in respect of a sum of Rs.18,30,944 spent towards the cost of additions made to the existing water works. The above expenditure of Rs.18,30,944 comprised the following components.

	Rs
Cost of civil works	9,52,944
Cost of pumps with electrical items	4,13,000
Cost of pipes	4,65,000
Total	18,30.944

The Income-tax Officer allowed development rebate only on the cost of pumps, electrical items and the cost of pipes and disallowed the claim in respect of the amount spent on civil works. The Appellate Assistant Commissioner allowed the claim of the assessee for development rebate on the full amount of Rs.18,30,944. While doing so, the Appellate Assistant Commissioner accepted the contention of the assessee that the entire construction of water works including civil engineering operations had to be treated as one plant. However, on appeal by the Revenue against the order of the Appellate Assistant Commissioner, the Tribunal affirmed the order of the Income-tax Officer and set aside the order of the Appellate Assistant Commissioner. Hence, reference of Question No.3.

Learned counsel for the assessee submits that the Tribunal has committed a manifest error of law in bifurcating the amount spent by it on the water works into amounts spent on pipes, pumps, etc., and amounts spent on civil works and restricting development rebate claim only to that part which pertains to pipes, pumps, etc. According to counsel, the water works as a whole have to be considered as a plant. Reliance is placed in support of this contention on the decision of this Court in CIT v. Mazagaon Dock Ltd. (1991) 191 ITR 460.

We have carefully considered the submission of learned counsel. The controversy in this case is squarely covered by the ratio of the above decision of this Court. Following the same, we hold that the civil work was an integral part of the water works, because without the civil work, the pipes and pumps cannot perform the function of the water works. The expenditure incurred by the assessee on the water works as a whole including that on the civil works is, therefore, to be treated as a part and parcel of the expenditure incurred on the water works and development rebate has to be given on the entire amount. In this view of the matter, in our opinion, the Tribunal went wrong in bifurcating the expenditure into expenditure on civil works and expenditure on pipes, pumps, etc., and restricting the development rebate only to the expenditure incurred on pipes and pumps. In view of the above question No. 3 is answered in the negative and in favour of the assessee.

So far as questions Nos.4 and 5 are concerned the same are not pressed by the assessee in view of the relatively small amount involved and the long lapse of time. These two questions are, therefore, returned unanswered.

The controversy involved in question No.6 is covered in favour of the Revenue by the decision of this Court in M.H. Daryani v. CIT (1993) 202 ITR 731. Following the same, it is answered in the negative and in favour of the Revenue.

The controversy in question No.7, which is referred at the instance of the Revenue, also stands concluded in favour of the Revenue by the decision of the Supreme Court in Escorts Ltd. v. Union of India (1993) 199 ITR 43. Following the same it is answered in the negative and in favour of the Revenue.

This reference is disposed of accordingly.

In the facts and circumstances of the case, there shall be no order as to costs.

M.B.A./1239/FCReference answered.