Per K. S. Vishwanathan, Vice President - The assessed, a Ltd. Company, has raised a number of grounds in their appeal against the order of the CIT (Appeals) disposing of the assessment for the year 1981-82. These are discussed seriatim.

2 to 9. [These paras are not reproduced here, as they involve minor issues.]

10. The next issue is a claim for deduction of the provision for electricity surcharge. There was some dispute going on between the assessed and the Rajasthan State Electricity Board regarding the rate at which the supply of electricity should be charged. According to the assessed, all new industrial undertakings or expansion units could be charged by the Electricity Board only at concessional rate. However, from Nov. 75 onwards, the Electricity Board charged at full rate. The assessed, however, refused to pay the full amount. On that account, the Electricity Board had levied 2% per month as a surcharge for non-payment. The assessed approached the court for stay of the payment, which was granted. However, in the books, a provision was made towards the disputed demand. The amount of provision for this accounting year is Rs. 83,936 in the Nylon Division, and Rs. 63,793 in the Rayon Division.

11. Both the assessing authority and the CIT (Appeals) had rejected the claim. The CIT (Appeals) pointed out that the liability arose out of a contract. Therefore, the legal position was that the liability would be admissible only when it was settled. Since that did not happen during this year, he held that the assessed was not entitled to the deduction.

12. Before us also, Shri Sharma had raised the same point. According to him, this was a statutory liability. Even the demand notice received from the Electricity Board refers to sec. 24(1) of the Indian Electricity Act, 1910. We are unable to accept this submission. The CIT (Appeals) is correct in his finding that the liability is only contractual. Before the assessed, or for that matter any consumer, gets supply of power from the Electricity Board, they have to enter into an agreement. The supply of power is regulated as per the terms of this agreement. This agreement read with the other concessions available to the assessed and offered by the Board to new industrial undertakings, determined the amount payable. The Electricity Board cannot, without the consent of the consumer, vary the amount payable. We have an authority in the case of CIT v. Nadiad Electric Supply Co. Ltd. [1971] 80 ITR 650 (Bom.) which supports the view. That was reverse of this case. Therein, the Electricity Board charged an amount over the contractual amount. The Department brought that amount to tax taking it as a revenue receipt. The Bombay High Court pointed out that the extra amount claimed in the bills, would not take the character of a revenue receipt. Sending the bills amounted merely to making a claim for the amounts mentioned in the bill. The mere sending of bills did not create a legally enforceable right in the electricity company, nor a corresponding legal enforceable obligation on the municipality which was the consumer in that case. Thus, we are satisfied that a claim by the Electricity Deptt. did not crystallise as a liability and the assessed is not entitled to this deduction.

13 to 28. [These paras are not reproduced here, as they involved minor issues.]

29. In Ground No. 15, objection is taken to the treatment of Rs. 1,37,018 as capital expenditure. The total expenditure under the head "Building Repairs" was Rs. 50,02,544. The ITO scrutinized the expenses exceeding Rs. 10,000. He found that they contained capital expenditure and so he disallowed Rs. 1,37,018. Before the CIT (Appeals), the assessed took up two pleas. The first was that, no disallowance was proposed in the draft assessment order. So, nothing could be disallowed in the final order. The CIT (Appeals) found that in the draft order, a proposal has been made for the disallowance, but it did not figure in the computation. So he rejected this legal submission. On fact, he agreed with the ITO.

30. Before us also, the assessed has reiterated the two submissions. For the reasons given by the CIT (Appeals), we do not consider this as an afterthought subsequent to the approval of the draft by the IAC. The disallowance has already been suggested in the original order and the omission is only clerical. With regard to the merits of the contention, we find that some of the items are capital in nature. Rs. 30,000 has been spent on kitchen cabinet. Obviously, a new cabinet has been made. Rs. 57,000 have been spent on addition on cupboards. This is also in addition to the assets. However, in respect of the rest of the expenditure, we are of opinion that no disallowance is called for. We are discussing them below :

(i) Park Shed for new school bus Rs. 23,003. The school bus clearly is not an asset of the assessed. On the other hand, the assessed has merely provided certain facilities for the running of a school. It is in connection with the provision of such facilities that a new shed has been constructed for the bus. The assessed company does not derive any benefit from such construction, except that it is an expenditure incurred for providing facilities for the employees children. It is a business expenditure, but that expenditure does not create for the assessed any advantage of an enduring nature. The advantage is for the 3rd parties. The amount spent by the assessed may be debitable as revenue expenditure even if it results in the acquisition of a capital asset by a third party. In this connection, we may refer to the decision of the Madras High Court in the case of CIT v. T. V. Sundaram Iyengar & Sons (P.) Ltd. [1974] 95 ITR 428. In that case, the assessed had acquired a piece of land in which houses would be constructed for the employees. Holding that the expenditure was of revenue nature, the High Court pointed out that the assessed company would not have any interest in the buildings to be built on the land and their obligation was only to contribute their share towards the scheme for construction of the properties for the workers. It cannot be said that the company expected to acquire or bring into existence any advantage for the enduring benefit of the business and the expenditure was more as a matter of commercial expediency. The same logic would apply here and the expenditure would be admissible.

(ii) The second item is Contractors bill for dismantling for Rs. 25,560.

The expenditure on dismantling of existing structure could be capital or revenue depending upon the reasons for dismantling. If their dismantling was in connection with putting up of another structure thereon, then it is part of the cost of structure to be put up later. So, it would be capital expenditure. If, on the other hand, the dismantling was merely to facilitate a smoother flow of traffic or stock in the assesseds factory, like removal of an impediment, it would be revenue expenditure. Since the assessed had not given the details, the department may be justified in holding that it was part of the capital expenditure.

(iii) Wall paneling & pelmets - Rs. 20,455. This is clearly in the nature of revenue expenditure. These are not new additions made, but change of the paneling in the wall and putting new pelmets.

They are to be allowed as business expenditure.

(iv) Toilet fittings - Rs. 21,000.

It is not as if there were no fittings in the toilet before. They are merely changes, probably changes for better or modern fittings. These are to be allowed as business expenditure.

Thus, out of Rs. 1,37,018, we would admit Rs. 64,458 as business expenditure. The balance would be sustained as capital expenditure. The ITO will, however, allow depreciation thereon.

31. and 32. [These paras are not reproduced here as they involve minor issues.]

33. In Ground No. 17, the issue is the disallowance of Rs. 3,89,167 representing mess expenditure. The total expenditure under this head was Rs. 4,49,187. They were mainly incurred in providing light refreshments to the staff at the various branches. The IAC in the draft assessment proceedings accepted that a part of the expenditure would be admissible and he directed allowance of Rs. 60,000. The balance, i.e., Rs. 3,89,167 was disallowed. The CIT (Appeals) found that the expenditure was in the nature of guest house expenditure. The expenses were for the maintenance of those guest houses at Kota and Jaipur and relate to the purchase of provisions, maintenance of premises, payment to the employees etc. It was submitted before the CIT (Appeals) that though this expenditure was on the guest house, the employees had paid for a part of the expenditure. The CIT (Appeals) found that the guest houses were used by persons other than employees also. They were clearly expenditure for the maintenance of guest house and, therefore, inadmissible.

34. It was submitted before us that, for the assessment years 1976-77 to 1978-79, similar expenditure had been allowed by the Tribunal. However, in respect of the assessment year 1980-81, the Tribunal had upheld the departments contentions and disallowed the expenditure. It was further submitted that the expenditure should be considered for disallowance only under sec. 37(4), but it was submitted that, what can be disallowed is only expenditure for maintenance. These expenses, it was submitted, did not come under the category of the expenditure for maintenance of the guest house. Maintenance would be only on building or on salaries to the employees of the guest house, watchmen etc. The actual expenditure on running a kitchen in the guest house would not come under this type of expenditure. Shri Sharma pointed out that the purpose of sec. 37(4) was to discharge expenditure on luxurious accommodations. Since these expenses do not fall under this category, they ought not to have been disallowed. Shri Sharma further pointed out that if an employee was provided meals in the office, that would be an admissible expenditure. The position should not change merely because the meals are provided in a guest house and not in the office. Such a construction should not be given in the interpretation of the section. The Departmental Representative, on the other hand, submitted that the term maintenance is very comprehensive and would include other types of expenditure connected with the guest house. He pointed out that even depreciation, which is not part of an expenditure at all, is also to be disallowed as per the provisions of this section. Under these circumstances, he submitted that a narrow interpretation of this section is not warranted.

35. We have considered the submissions. We have to interpret sec. 37(4), which reads as follows :-

"37(4) Notwithstanding anything contained in sub-section (1) or sub-section (3), (i) no allowance shall be made in respect of any expenditure incurred by the assessed after the 28th day of February, 1970 on the maintenance of any residential accommodation in the nature of a guest house (such residential accommodation being hereafter in this sub-section referred to as guest house)

(ii) in relation to the assessment year commencing on the first day of April, 1971 or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest house or depreciation of any assets in a guest house."

36. The expression we are called upon to interpret, is the maintenance of any residential accommodation in the nature of guest house. What is intended is to disallow such expenditure which would go into the maintenance of the residential accommodation. The question is, what are the types of expenditure which could be called maintenance expenses. Undoubtedly, those expenses which are incurred in preserving the building in good repair, would definitely be maintenance expenditure. Further salary on the staff required to look after the building, such as the watchman, would definitely be part of such expenditure. If the guest house has a garden appurtenant to it, the maintenance of the garden and therefore salary of the gardener would also be a part of the expenditure. We may take some assistance from the authorities who had occasion to consider similar expression. In Law Lexicon Vol. 2 of Venkatramaiya, at page 1389, the expression "maintain an airport" has been considered. It is reproduced below :-

"To maintain an airport is to keep it in state of efficiency for the furnishing of those facilities and the rendition of those services which air transportation and communication demand (Concordia Arrow Flying Service Corp. v. City of Concordia, 131 Kan 247 : 289 p. 955 at p. 957 :

Satiya v. SDO, PWD Building and Works (1974) ACJ 431 at p. 434). The word maintain only means to keep up, to preserve.

It does not include reclamation of the lands. (Md. Hussain Rowther v. Kasaiyyo Sholagar (1966) 2 M. L. J. 312 at p. 313. )"

37. It will be seen from the above that the expenses would include those necessary to keep it in a state of efficiency, i.e., to preserve it any make it available for the purpose for which it is maintained.

38. We may also refer to those decisions given in the Income-tax Act while considering whether a non-resident was maintaining a dwelling house, so that he can be considered as a resident. In section 4a (a) of the 1922 act, a non-resident, who maintains a dwelling house, would be treated for certain purposes as a resident. In the case of S. M. Zackariah Sahib v. CIT [1952] 22 ITR 359 (Mad.), it has been held that the expression connotes the idea that the assessed owns or has taken on rent or on a mortgage with possession a dwelling house, which he can legally and as a right occupy if he is so minded during his visit in India. It has also been held that the mere fact that the assessed remitted money now and then for the maintenance of his wife or aged parents, does not mean that a dwelling house was maintained by him. This was further discussed by the Bombay High Court in the case of Dhirajlal Haridas v. CIT [1982] 138 ITR 570, where the assessed who had gone over to South Africa, had left behind his family who was staying with his sister. The assessed was meeting the expenditure of the family including that of the sister. Even then, the High Court held that the assessed was not maintaining a dwelling house in India.

39. We are of opinion that the assesseds submission is reasonable. We cannot say that the expenditure on running a kitchen in the guest house will be includible in the expenditure for the maintenance of a guest house. No doubt, the salary paid to the cook would be part of the guest house expenditure. Otherwise, it would not be a guest house. It will be merely a house. But we are not concerned with the salary of the employees in the guest house. We are concerned with other expenses on items like provision for food and drinks, made available in the guest house. This expense would be ambulatory. The expenditure would be practically nil if there were no guests. If, on the other hand, there were a large number of guests entertained in the guest house, the expenditure would be considerably large. Thus, there would be vast variation in the expenditure and we cannot say that such variation in the expenditure is part of their maintenance of a guest house. Besides, we are also impressed by the submission of Shri Sharma that, where meals are provided in the office, the expenses would be admissible and when provided in the guest house, it would not be the admissible. Such inference would be bordering on absurdity and should not be the basis for the interpretation to be given of this section. We will, therefore, agree that the expenditure incurred in merely providing refreshments, meals, etc., to the employees, even though it may be at the guest house or from the the guest house, they would be admissible as business expenditure.

40 to 53. [These paras are not reproduced here, as they involved minor issues.]

54. In ground No. 21, the claim of the assessed is for weighted deduction under section 35B in respect of certain expenditure which have been listed in the assessment order at para 26. Several claims were made, which were rejected by the ITO and the CIT (Appeals). Before us, Shri Sharma submitted that it would press only for deduction in respect of two amounts, i.e., Rs. 7,71,902 and Rs. 14,828. These expenses have been incurred by the assessed in the travel of their employees to Kenya. The admissibility of a part of this expenditure has already been considered by us while discussing the expenditure in connection with the travel undertaken by the families of the employees. The expenditure of Rs. 14,828 has been incurred in connection with trade fairs.

55. In order to understand the assesseds claim, certain details regarding their enterprise in Kenya has to be given. The assessed company had entered into an agreement with Industrial & Commercial Development Corpn., a public sector undertaking of the Republic of Kenya on 2-9-75 under which the assessed company agreed to promote and participate in the development of industry in Kenya by agreeing to establish a project for manufacture of synthetic fibres. Under this agreement, the assessed would be a joint promoter of a project and would also be a substantial shareholder therein. As per clause 7 of this agreement, the assessed would hold 49% of the shares. The assessed would also supply the company, which would be floated later, with management and technical services. The assessed would enter into a separate agreement for this purpose and that is envisaged in clause 14.

56. A company called Africa Synthetic Fibres was floated by the Industrial & Commercial Development Corporation, Kenya and the assessed is to have 49% shares therein. The assessed company entered into an agreement with this African Synthetic Fibre Ltd. (ASFL - for short) on 16/2/1976 under which ASFL was described as the employer and the assessed as managing agent. The managing agent would supervise the design and construction of the factory to be put up by ASFL. Clause 1 of the agreement stated that the assessed would be serving ASFL as a technical consultant, in connection with the establishment and commissioning of the factory. Several powers have been given to enable the assessed to discharge their part of the contract. The consideration for the technical services to be rendered is given in clause 7. This clause says that the managing agent shall be entitled to receive from ASFL 7 1/2% of the net profit from the date on which the factory starts production. This was subject to a minimum of 250,000 Kenyan Shillings. It was further submitted that, during the period from the signing of the agreement to the date of commercial production, the ASFL shall not pay the managing agent any fee, and other benefits as shall be agreed between the two and as per the provisions of clause 4(c) of the contract. This clause 4(c) stated that the assessed would replace a suitably qualified and experienced representative of the managing agent to act on behalf of the managing agent and be responsible to ASFL to ensure the proper discharge of duties of the managing agent. It is common ground that the assessed had, during the accounting year, received consideration as per clause 7 of the agreement. The consideration received during the year was Rs. 15.36 lakhs. The assesses claim is that the expenditure in travel abroad was in connection with the earning of this technical fees from ASFL and, therefore, the claim would be admissible under section 35b (2) (vii). The Departments case, on the other hand, is that the travel was in connection with the acquisition of the part ownership of ASFL to the extent of 49%. Therefore, the expenditure was not in connection with any export development.

57. We have considered the submissions. It is difficult to accept the Departments contention that the entire travel is in connection with the capital asset, i.e., the part ownership of the African company. No doubt, the assessed, under the agreement in 1975, had agreed to promote a company in Kenya and agreed to take 49% of the shares. But, after the company has been promoted, the assessed had entered into a separate agreement with ASFL and it is the assesseds case that the fees is received in connection with the technical assistance rendered by them. The Departments case that it is part of the acquisition of the capital asset in Africa is not acceptable since the technical fees is directly connected with the technical assistance given by the assessed company to ASFL. It may be that the assessed holds 49% of the company, but that company is the separate body. They are, i.e., the assessed and the African company having separate identities can come to an agreement with regard to the technical assistance. There is no bar in the assessed company giving technical know-how to their own subsidiary companies and receiving technical fees from them. This is how all multinational companies all over the world get technical fees from the subsidiary companies floated by them in the Third world. The agreement, therefore, is an agreement at arms length and should be considered in that light.

58. The next objection of the Department was that the assessed had not given any services and whatever services were given, was by the employees themselves, who were directly answerable to the African company. It is not doubt true that, under clause 4(c) of the agreement, the assessed would nominate an experienced officer who would be in overall charge of the project, and who would be discharging the assesseds obligations under the contract. However, that agreement in respect of a nominee, would be only up to the date on which the African Company would be commissioned. Thereafter, the assessed would be directly responsible. We find that the African Company was commissioned on 15-4-1980 and this is made clear from the printed Directors report for the year 1979 in paragraph 14. As per the agreement, the assessed has to take over from their nominee the overall working of the project. Apart form that, the assessed has, as a matter of fact. Therefore, the assessed has certain receipts accruing to it abroad. The question is, therefore, whether this represented the transfer of services or facilities outside India for the purpose of section 35b (2) (vii). On the admitted finding that the assessed is to provide technical know-how and the assessed is to receive fees thereof, it will be very difficult to say that the assessed was not in the business of promotion of the sale outside India of services or facilities. It may be, as the Department says, there is only one such institution for which the assessed had received technical fees. But that has, in itself, all the elements of business. The technical know-how the assessed had acquired is a by-product of the assesseds business in Synthetic fibres. Thus, it arises directly from the business. It is a business or commercial asset. The assessed was able to find at least one buyer for this asset abroad. So it is certainly part of the business of providing technical know-how.

59. The next objection to be considered is, whether the transfer would be part of the cost of providing the technical assistance. If it were to be a part of the cost, then certainly the assessed would not be eligible for the deduction. What can be considered for the purpose of section 35B is the expenditure on a product which is in a condition of being transferred. In the case of J. H. & Co. v. Second ITO [1982] 1 SOT 150 (Bang.) (SB), at page 168, a similar question has been considered. Paragraph 23 of that order is reproduced below :-

"23. Before concluding this part of the order rendered commonly for all the appeals heard together, we may also refer to the arguments advanced on the side of some of the assesseds that in that case of a manufacturer producing goods for export, as the case of a trader procuring goods for the same purpose, everything spent by the former on the production of the exported goods and by the latter on the purchase and procurement of such goods, should be taken as expenditure entitled to benefits under sub-clause (iii). The trend of the argument is that, without the production or the procurement of such goods, their distribution or supply is impossible and, hence the expenditure incurred on the former will form part of the expenditure incurred on the latter. The contention is clearly untenable. The section, as a mere reading of it clearly indicates, covers expenditure incurred on specified activities in respect of goods, services or facilities which the assessed deals in or provides in the course of this business. Clearly, therefore, the activities referred to therein are those undertaken at a stage after the goods are brought into existence, whether by manufacturer or by purchase and procurement, as commodities for export. Activities of distribution and supply of goods are to commence only after the goods themselves are made ready. In other words, section 35B, to our mind, provides for weighted deduction in respect of expenditure on some specified activities in relation to or in connection with the export of goods, services or facilities which are peculiar and in addition to the normal expenditure incurred by a dealer, if he is not exporting them. That being so, it would be futile to contend that production and procurement of goods would also form an integral part of their distribution and supply. We, therefore, find it impossible to accede to the assesseds contention that expenses incurred by way of cost of the goods exported should also be taken as attracting the benefit of sub-clause (iii)."

60. There is absolutely no quarrel to this proposition, especially since Delhi High Court has approved in toto the Special Bench decision. However, the question still remains, whether the transfer expenses would be a part of the cost. A close reading of the section would show that the traveling expenses considered therein is for traveling for promotion of the sale outside India of the services, i.e., the object should be the promotion of sales and not the provision of sales. A tour outside India by which the assessed could bring to the notice of the potential customers outside of the assesseds expertise and technical know-how would be covered by this section. But a tour taken in connection with the provision of such technical know-how, cannot come under this section. We think there is force in the Departments contention on this part of their objection, i.e., the expenses involved are part of the cost of providing the services.

61 to 72. [These paras are not reproduced here, as they involve minor issues.]

73. In Ground No. 28, the assessed company is claiming deduction under section 80-O, which has been denied by the ITO and the CIT (Appeals) both. In the earlier paragraph, while dealing with the claim of the assessed for deduction under section 35B, in respect of traveling expenditure of Rs. 7,71,902, we have referred to an agreement, the assessed had entered into to provide technical know-how to the African Company, ASFL. We have also referred to the fact that during this accounting year, the company had received the equivalent of Rs. 15,35,907 in Kenyan Shillings. Claiming that this receipt is fee for technical services, the assessed claimed exemption for the entire receipt on the ground under section 80-O. The claim was rejected by the ITO for three reasons. According to him, the income is not of the nature covered by section 80-O. In other words, the objection was that it is not representing technical fees. The second objection was that the approval of the Reserve Bank was received in the year 1982 only. No evidence was brought on record to co-relate the approval with the receipts for which deduction is claimed. Thirdly, the assessed did not clarify, whether the exemption was on the gross receipt of the technical fees or the income by way of fees.

74. The assessed appealed. The CIT (Appeals) referred to the various clauses in the agreement between the assessed and ASFL and found that the payment made was in respect of the salary etc. charged from the ASFL for the services of the technicians sent from India. These were not, according to the CIT (Appeals), payments in the nature of fees, but merely salaries payable to the employees. He further held that the payment did not fall under any of the types referred to in section 80-O, i.e., royalty, commission, fees, or any similar payment. The assessed had merely sent a few carpenters, masons and mechanics and charged from ASFL their salaries at the rates agreed between the two companies. Therefore the assessed was not eligible for the deduction.

75. Shri Sharma submitted that the assessed-company had made similar claims for the prior assessment years of 1978-79 to 1980-81 also. For the first two years, it was allowed by the ITO himself. For 1980-81, although it was initially not admitted at 144B proceedings the IAC accepted the assesseds contentions and have allowed the claim. For the first time, in this assessment year, objections are being raised for the allowance. He submitted that none of these objections have any real merit. He first submitted that, what is received by the assessed was technical fees. He referred to clause 14 of the agreement, under which the assessed had to provide technical services. The remuneration received is for these services and it must be only technical fee. He further submitted that the two agreements, the assessed had entered into, have already been approved by the CBDT vide their letter dated 6-12-1978. With regard to the quantum, he submitted that, in view of the decision of the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120, some expenditure will have to be set off against the receipts and they could be estimated at 1/10th of the receipts. Shri Aggarwal for the Department, submitted that, in deciding the issue, certain observations of the Supreme Court in the case of Petron Engg. Construction (P.) Ltd. v. CBDT [1989] 175 ITR 523 should be kept in mind. They were given on page 527. Therein, the Supreme Court has listed 6 conditions and unless these were satisfied the assessed would not be eligible for the deduction. In this case, it is the submission of Shri Aggarwal, that these 6 conditions which are cumulative, are not satisfied. Regarding the finding of the CIT (Appeals), he submitted that the assessed had not rendered any technical services. What was paid is only salary. Referring to the earlier assessments, where this was allowed, he submitted that, in view of the development of law and fresh facts, the claim should be reconsidered.

76. We have considered the submissions. As Shri Aggarwal pointed out, the Supreme Court has listed 6 conditions for enabling the assessed to get the deduction. These are at page 527 of 175 ITR and are :

"1. The assessed must be an Indian Company.

2. The income by way of royalty, commission, fees, etc. must be received by the assessed from the Govt. of a foreign State or a foreign enterprise.

3. The consideration shall be for the use outside India of any patent, invention, model, design, etc., made available or provided to such Govt. or enterprise by the assessed or technical services rendered or agreed to be rendered outside India to such Govt. or enterprise by the assessed.

4. The agreement must be approved by the Board.

5. The income received by the assessed shall be convertible foreign exchange.

6. The deduction shall be in respect of the whole of such income received in or brought into India."

77. There is no difficulty with regard to Condition No. 1. According to the Department, Condition Nos. 2 & 3 have not been satisfied. There is no doubt that the fees has been received from a foreign enterprise, but the question is, whether this fee has been paid for technical service. We have no doubt at all, in our mind, that the fee has been paid for technical services. The services, as such are listed in the agreement with ASFL and given in clause 4. As per this clause, the assessed has to advise the employers with regard to the activities in the business, construction, completion and commissioning of the factory, as well as in procurement of all materials, plant, machinery, equipments, etc. Clause 4A is really comprehensive and gives complete picture of the work, the assessed is supposed to do. The other clauses (B) to (K) are merely elaborations of clause (A). When the assessed is called upon to completely supervise in setting up a factory, necessarily it involves providing the technical services. It is imparting industrial, commercial or scientific knowledge and also bringing to bear their experience and skill to the foreign enterprise. Therefore, in our opinion, this contention is also satisfied. So condition Nos. 1, 2 & 3 are satisfied.

78. There is no doubt that the Board has approved the agreement and, therefore, the condition No. 4 is also satisfied.

79. The assessed had been paid for the services in convertible foreign exchange. So this condition is also satisfied.

80. Before we come to the last condition, i.e., whether the money is brought to India or not, we must refer to the reasoning given by the CIT (Appeals). He opined that the assessed had sent only a few masons and carpenters and, therefore, what was received, was only in the shape of salaries for these persons. It did not represent technical services. Such a finding overlooks the assesseds responsibilities given in clause 4 of the agreement. The assessed being an incorporate body has necessarily to work out their part of the agreement through the employees. Therefore, it is necessary for them to send their employees and executives. We, therefore, do not find much merit in this objection.

81. The last objection is that the money has not been brought into India. It may be recalled that the assessed had, in their agreement with Industrial and Commercial Development Corporation of Kenya, agreed to subscribe to 49% of the equity capital. It involved remitting money from India to Kenya. The Reserve Bank had suggested to the assessed that they should utilise the technical fees receivable from ASFL towards the contribution of their share in the equity capital. Thus, the amount really did not reach India and were straightway invested in Kenya. On this account, it is claimed that the money has not been brought in India. As a matter of fact, the requirement in section 80-O is that such is either received in convertible foreign exchange in India or having been received in convertible foreign exchange outside India is brought to India in accordance with the law for the time being in force for regulations of the foreign exchange. Therefore, the requirement that the foreign exchange should be brought to India, should be according to the Foreign Exchange Regulations Act. Under section 27 of FERA, no person resident in India, without the previous permission of the Central Government associate himself with, or participate in, whether as promoter or otherwise, any concern outside India engaged in, or intending to engage in (any activity of a trading, commercial or industrial nature), whether such concern is a body corporate or not. Any one who desires to do so, must get permission from the Central Govt. under section 22. The permission granted would be subject to directions and requirements given by the Reserve Bank from time to time. It is an admitted position that such a permission, as envisaged in section 27(2) has been given to the assessed. In the normal course, they would have repatriated the foreign exchange into India. But then there was also an obligation on their part to remit funds towards their subscription or equity capital. The Reserve Bank directed them to utilise the amount available at Kenya for this purpose. This directive of the Reserve Bank must be construed as a permission of the money having been received in India to be repatriated outside India. Thus, for the purpose of FERA, the money has been brought to India and so this condition also is satisfied. It remains to be seen as to the quantum of deduction. According to the assessed, the quantum of deduction would be only equal to the salary paid to these employees in India, which can be roughly quantified at 1/10th. However, we find that the assessed has also incurred the traveling expenditure of Rs. 7,71,902. Surely, this is also relatable to the receipts. But the assessed had stated that these expenses were reimbursable by the African Company. If it is reimbursable, then the assesseds contention must be accepted. The deduction of expenditure to earn the income may be roughly estimated at 1/10th. The assessed will be eligible for the exemption under 80-O in respect of the balance.

82 to 83. [These paras are not reproduced here, as they involve minor issues.]

84. At the time of hearing, the assessed had raised one additional ground. The ground reads as follows :-

"On the facts and in the circumstances of the case, the ITO should have allowed deduction of Rs. 1,86,49,403, being the expenditure incurred on acquisition of capital assets used for scientific research carried on by the assessed in its research division at Kota, the expenditure having been claimed in assessment year 1982-83 and found by the learned ITO as pertaining to the assessment year 1981-82."

85. The Departmental Representative objected to the admission of the additional ground. The reason for raising of the additional ground is as follows :

"The assessed has a scientific research project for which they were purchasing capital assets from time to time. In the Income-tax proceedings, they were claiming deduction under section 35(4) in respect of these assets only in the year in which the assets were to be put to use for research. This method was acceptable to the Department till the assessment year 1982-83. In that year, the ITO, for the first time, held that the claim made for that year of Rs. 1,86,49,403 was not admissible because the expenditure was not incurred during the relevant accounting year. The word incurred was interpreted to mean the date when the supplier of the machines raised the bill or the date when the asset was actually entered in the business premises. In this view, he disallowed the claim for the year 1982-83."

86. The assessed has gone on appeal against this and the ITOs finding has been upheld.

87. The assessed is in further appeal before the Tribunal. In case the Tribunal were to uphold the Departments contention, the assessed would not get the deduction for the year 1982-83 and also would be ineligible for the deduction for the year 1981-82, because no such claim was made. Thus, the assessed would lose on both the counts. In order to set right this anomaly, the assessed had claimed in an additional ground that it would be admissible as a deduction on Departments own reasoning for the assessment year 1982-83.

88. With regard to the question of admissibility of the additional ground, we are of opinion that the assessed should be allowed to raise this ground. There was, during this year, a claim made under section 35 of an amount of Rs. 22,52,984. This was allowed. So there was no ground before the CIT (Appeals) on this point. Now, before the Tribunal, the assessed has raised the ground claiming additional amounts as admissible. All the facts necessary to decide the issue are already on the departments records. Therefore, the basic material to decide the issue is available. Then the question is, whether it is admissible in the year in which the asset was acquired, i.e., in 1981-82 or in the year in which the asset was put to scientific research, i.e., 1982-83. This is purely a question of law depending upon the interpretation of section 35. Therefore, such an issue can be raised by the assessed.

89. In this connection, we would refer to the decision of the Madras High Court in the case of Shree Rajgopal Transports Ltd., 144 ITR 573. In that case a deduction of Rs. 37,132 had been claimed by the assessed. But in the appeal proceedings, they enlarged the claim to Rs. 1,02,605. The High Court held that the claim in the original stage related to a part of the larger amount of Rs. 1,02,605 and, consequently, the Tribunal was right in entertaining the fresh ground. Here also, the original claim of about Rs. 22 lakhs had been enlarged into a claim of Rs. 1.86 crores and the Tribunal would be justified in entertaining this ground.

90. A similar decision has been given by the Calcutta High Court in the case of Madhu Jayanti (P.) Ltd. v. CIT [1985] 154 ITR 277. Therein, the assessed had made claim under section 35B in respect of some expenditure, but before the Tribunal, for the first time, they enlarged the claim and the High Court held that the assessed could be allowed to make such enlarged claim by way of additional ground.

91. Having held that the claim could be entertained at this stage, it is necessary now to go into the merits. Section 35(iv) reads as follows :-

"35. Expenditure on scientific research - In respect of expenditure on scientific research, the following deductions shall be allowed :-

(i) to (iii) ** ** **

(iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessed, such deduction as may be admissible under the provisions of sub-section (2)."

92. It would be seen from the above that the assessed should first incur an expenditure and that expenditure should be for scientific research. If these conditions are satisfied then the deduction would be admissible.

93. There is a theoretical possibility of an interregnum between the incurring of the expenditure and the user of the same for scientific research. Certain machineries, purchased by the assessed, might be useful both for business as well as for scientific research connected with business. At the point of time, they may decide to utilise the same for scientific research. It is obvious that the deduction would be admissible only when the assessed brings to use such machineries for scientific research.

94. The dichotomy between the business and the scientific research is well brought out in the section itself. For instance, 35(2) (v) contemplates a situation where the asset is used in business after it ceases to be used for scientific research. If that is possible, the opposite is also possible, i.e., an asset ostensibly acquired for business being later utilised for scientific research. In this connection, we may refer to the decision of the Special Bench of the Tribunal in the case of ITO v. Vickers Sperry of India [1983] 3 ITD 739 (Bom.). Therein the argument was raised that expenditure on scientific research must necessarily mean expenditure for the purpose of business. At page 745, the Special Bench observed :

"Having regard to the inclusive definition of the expression scientific research related to the business in sec. 43(4) (iii) (a) and the plain dictionary meaning of the word related, we are inclined to hold that the Legislature has used two expressions at two different places on purpose, though we also hold that the two expressions do not represent the two sides of a coin so that there can never be simultaneous user for scientific research and for the business."

95. It is, therefore, clear that there is a difference between the acquiring of an asset and bringing it into use for scientific research. Under sec. 35, it is only at the stage when the asset is brought into use for scientific research that the deduction could be claimed. This is what the assessed has done. We do not, therefore, see any difficulty in accepting the assesseds submissions. It is also eminently reasonable and safeguards the interest of Revenue. As pointed out by Shri Sharma, there may be cases, where the assessed acquires an asset ostensibly for scientific research, but never puts it to use for that purpose. As per the view of the ITO, deduction under sec. 35 would be admissible in such cases and the Department would be a loser. The method suggested and followed by the assessed safeguards the Revenue. We, therefore, have no hesitation in accepting the assesseds contention. However, as far as this additional ground is concerned, on the assesseds own reasoning and submissions, this will have to be rejected. This amount is admissible as a deduction for the assessment year 1982-83.

96. In the result the appeal is disposed of accordingly and treated as partly allowed.