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Issues Involved:
1. Deduction under Section 80J of the Income-tax Act, 1961. 2. Deduction of provision for gratuity. 3. Deduction for disputed water charges. 4. Deduction of expenditure for process and designs. 5. Deduction of surtax liability. 6. Increased development rebate for priority industry. Detailed Analysis: 1. Deduction under Section 80J of the Income-tax Act, 1961: Issue: The assessee claimed a deduction under Section 80J for its CPC and Methoxylation & Ammoniation plants, which was partially disallowed by the ITO. Judgment: The Tribunal found that Rule 19A(3) of the Income-tax Rules, 1962, which mandates the exclusion of borrowed capital in computing the capital employed for Section 80J, is repugnant to the section itself. The Tribunal emphasized that the capital employed should be the total value of the assets of the new industrial undertaking without deducting liabilities. The Tribunal followed the Calcutta High Court's decision in Century Enka Ltd. v. ITO and the Madras High Court's decision in Madras Industrial Linings Ltd. v. ITO, which struck down Rule 19A(3) as ultra vires. Consequently, the Tribunal allowed the assessee's claim for the full deduction under Section 80J. 2. Deduction of provision for gratuity: Issue: The assessee introduced a gratuity scheme and made a provision of Rs. 8,00,000 based on actuarial valuation, which was disallowed by the ITO. Judgment: The Tribunal held that the provision for gratuity based on actuarial valuation should be allowed as a deduction. The Tribunal relied on the Bombay High Court's decision in Tata Iron & Steel Co. Ltd. and the CBDT Circular No. F. 9/100/69-IT (A-I), dated 2-9-1970. The Tribunal allowed the entire provision of Rs. 8,00,000 as a deduction. 3. Deduction for disputed water charges: Issue: The assessee made a provision for disputed water charges, which was disallowed by the ITO because the liability was under dispute and a stay order was obtained. Judgment: The Tribunal held that since the liability was ultimately settled with the Irrigation Department, the assessee is entitled to the deduction of the actual liability settled during the year under consideration. The Tribunal allowed the deduction based on the settled amount. 4. Deduction of expenditure for process and designs: Issue: The assessee claimed a deduction for the cost incurred for process and designs connected with its Cyanuric Chloride project, which was disallowed by the ITO as capital expenditure. Judgment: The Tribunal upheld the ITO's decision, stating that since the process and designs were not put to use during the year, the expenditure should be treated as capital expenditure. The Tribunal denied the claim for development rebate as the assets were not used in the business during the year. 5. Deduction of surtax liability: Issue: The assessee claimed a deduction for surtax liability, which was not allowed by the ITO. Judgment: The Tribunal held that surtax liability is not deductible in computing the income from business under Section 28 and/or Sections 29 to 43A, including Section 37, because it is the Government's share of the profit after it is earned and is an application of such profit. The Tribunal also held that the deduction is prohibited by Section 40(a)(ii) of the Income-tax Act. 6. Increased development rebate for priority industry: Issue: The assessee claimed an increased development rebate at the rate of 35% for its Beta Naphthol plant and other plants, asserting that it is a priority industry. Judgment: The Tribunal remanded the issue back to the ITO for examination and reconsideration on merits in accordance with the law. Summary: The appeal was partly allowed. The Tribunal allowed the full deduction under Section 80J, the provision for gratuity, and the deduction for disputed water charges based on the settled amount. The Tribunal disallowed the deduction for the surtax liability and the development rebate for process and designs not put to use. The issue of increased development rebate for priority industry was remanded to the ITO for reconsideration.
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