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Issues:
1. Whether the payment of royalties by the assessee to a collaborator constitutes revenue or capital expenditure. 2. Whether the relief under section 80-I should be granted on profits before set off of unabsorbed depreciation and development rebate carry forward. Analysis: 1. The first issue pertains to the nature of the payment of royalties by the assessee to its collaborator. The collaboration agreement involved the payment of fees to the collaborator for technical information. The Income Tax Officer (ITO) disallowed 25% of the fees, considering it as capital expenditure due to the enduring benefit theory. However, the Tribunal allowed the entire payment as a revenue deduction. The High Court, in a separate judgment, concluded that no part of the royalties constituted capital expenditure, even if the technical information provided had lasting benefits. The court held in favor of the assessee, emphasizing the nature of the collaboration agreement and the purpose of the payment. 2. The second issue revolves around the computation of relief under section 80-I for the assessee's priority industry. The controversy arose regarding the deduction calculation based on profits attributable to the priority industry. The ITO deducted the carry forward depreciation and development rebate of past years, while the assessee argued for deduction only of the current year's depreciation and rebate. The court referred to a Supreme Court ruling in Cambay Electric Supply case, which emphasized deducting unabsorbed depreciation and development rebate in arriving at the figure for relief under the section. The court rejected the assessee's argument of a double standard in the deduction approach, emphasizing consistency in tax relief computation for business income. In conclusion, the High Court ruled in favor of the assessee on the first issue, considering the payment of royalties as revenue expenditure. However, on the second issue, the court held that unabsorbed depreciation and development rebate of past years must be deducted to calculate relief under section 80-I for the assessment year, aligning with the Supreme Court's interpretation. The judgment provides insights into the interpretation of tax relief provisions and the importance of consistency in deduction calculations for tax purposes.
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