Rajasthan H.C : Whether on the facts and in the circumstances of the case and on interpretation of s. 35 of the IT Act, 1961, the learned Tribunal was right in law in not allowing deduction of an amount of Rs. 11,53,294 representing the written down value of assets transferred by the assessee-company from the business use to that of scientific research used in the previous year relevant for the asst. yr. 1980-81 as expenditure on scientific research ?

High Court Of Rajasthan : Jaipur Bench

Multi Metals Ltd. vs. CIT

Section 35(1)(iv)

Asst. Year 1980-81

Y.R. Meena & A.C. Goyal, JJ.

IT Appeal No. 31 of 1986

8th February, 2002

Counsel Appeared

N.M. Ranka, for the Applicant : J.K. Singhi, for the Respondent

JUDGMENT

BY THE COURT :

On an application under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following question for the opinion of this Court : “Whether on the facts and in the circumstances of the case and on interpretation of s. 35 of the IT Act, 1961, the learned Tribunal was right in law in not allowing deduction of an amount of Rs. 11,53,294 representing the written down value of assets transferred by the assessee-company from the business use to that of scientific research used in the previous year relevant for the asst. yr. 1980-81 as expenditure on scientific research ?”

2. The assessee-company derives income from sale and manufacture of tubes, print rolls, etc. The relevant assessment year is 1980-81. The brief facts in the return filed by the assessee are that the assessee claimed an expenditure of Rs. 11,53,294 incurred under the head ‘capital’ as expenditure relatable to scientific research. This amount included a sum of Rs. 11,14,885 which represented the written down value of assets, which assets were acquired earlier and used for the purpose of business but transferred to the Scientific Research Department during the financial year relevant to assessment year in question.

The claim of the assessee was that once the assets are transferred from business assets to the assets for scientific research, the assessee is entitled for the benefit of provision contained in s. 35 (1)(iv), as assessee has incurred expenditure for the assets acquired for scientific research. He further submits that the expenses incurred and the cost of the assets can be seen from the Expln 1 to s. 43(1) of the IT Act, 1961.

The AO has negatived the claim of the assessee holding that assessee has not incurred the expenditure for scientific research, in fact assets were acquired in the earlier years and this year only there is an entry in the books of accounts to the effect that these assets are now used for scientific research. AO further states that the assessee has explained that on 31st March, 1979, an entry was passed debiting the research and development expenses by an amount of Rs. 11,53,294 and crediting assets accounts by the same amount in scientific research side. This entry has been reversed on 30th June, 1980.

By debiting the fixed assets a/c and crediting the research and development a/c by a amount of Rs. 11,53,294 on that count also the assessee is not entitled for benefit of s. 35(1)(iv) of the Act.

In appeal before the CIT(A), CIT(A) has allowed the claim of the assessee but in appeal before the Tribunal, the Tribunal has restored the view taken by the AO.

Mr. Ranka, learned counsel for the assessee, submits that when the entry was passed on 31st March, 1979, debiting the research and development a/c by an amount of Rs. 11,53,294, there is a transfer and that amounts to expenditure on scientific research and the transfer entry of WDV be treated as cost of the assets within the meaning of Expln. 1 to s. 43 sub-s. (1) of the Act. Mr. Ranka places reliance on the decision of Madras High Court in the case of CIT vs. Sundaram Fasteners Ltd. (1997) 143 CTR (Mad) 328 : (1997) 223 ITR 455 (Mad) : TC S15.1489. He further places reliance on the decision in the case of CIT vs. J.K. Hosiery Factory (1986) 52 CTR (SC) 142 : (1986) 159 ITR 85 (SC) : TC 27R.727 and submitted that in that case, unabsorbed depreciation was there of the unregistered firm which was registered next year. In that case their Lordships have taken the view that unabsorbed depreciation can be carried forward and benefit can be given to the registered firm next year. Mr. Ranka further submits that in the case of Saroj Agarwal vs. CIT (1985) 49 CTR (SC) 183 : (1985) 156 ITR 497 (SC) : TC 33R.596, their Lordships (Supreme Court) have taken the view that while a partner of the firm died and the firm sustained the speculation loss, 3 days thereafter widow can run the firm under provision in the partnership deed regarding continuation of the partnership. Their Lordships have held that widow could be said to have succeeded by inheritance and she can claim the set off loss of her deceased husband sustained by the firm in speculation business against the speculation profit.

Mr. Singhi, learned counsel for the Department, submits that there is no expenditure in view of provision of s. 35 for the scientific research, therefore, there is no question of allowing the benefit of s. 35 in the facts and circumstances of this case. He further submits that the AO has already allowed depreciation to the assessee under s. 32 of the Act. Therefore, there is no question of allowing the assessee the benefit of deduction under s. 35 of the Act. Learned counsel in this connection places reliance on the decision of their Lordships (Supreme Court) in the case of Escorts Ltd. vs. Union of India (1992) 108 CTR (SC) 275 : (1992) 199 ITR 44 (SC) : TC 15R.369.

The facts are not in dispute that the assets in question were not purchased by the assessee in the year under consideration. They were purchased in the earlier year and used for business in the year under consideration. Assessee has made only an entry in the books of accounts on 31st March, 1979, debiting the WDV of those assets from the business assets a/c and crediting the WDV of the assets in the scientific research side. That entry has been reversed on 30th June, 1980.

Mr. Ranka submits that the AO has stated that 30th June, 1980, was the last day of accounting year but the last day of accounting year was 31st March, 1980. Sec. 35 of the Act provides that if the assessee has incurred any expenditure on scientific research, he/it will be eligible for the deduction as provided under s. 35 on account of the assets acquired for scientific research.

The admitted facts of the case are that the assessee has not acquired these assets this year. The machinery was acquired in the earlier year and was used for the purpose of business. This year, only there is an entry in the books of accounts to transfer these assets from business side to scientific research side, whether mere entry is enough to make eligible the assessee for deduction under s. 35 of the Act. In our view that will be contrary to the scheme of Act, 1961. Sec. 35 requires expenditure on scientific research.

In the case in hand, nothing has been brought on record that after transfer of these assets from business side to research side, what research the assessee has made with the help of machinery. The use of the machinery was same as that in the earlier year. Earlier year the machinery was used for production or manufacturing of goods. If same use has been taken of the machinery in this year, how assessee can get the benefit of s. 35. It cannot be the intention of the legislature that mere entry in the books of accounts from one head to other head will change the character of the assets for the purpose of allowance.

8. Mr. Ranka, learned counsel for the appellant, brought to our notice the Expln. 1 to s. 43(1) of the Act, 1961, which provides that where an asset is used in the business after it ceases to be used for scientific research related to that business, a deduction has to be made under cl. (2)(i) of subs. (1) of s. 32. In respect of that asset, the actual cost of the assets before the assessee shall be the actual cost to the assessee reduced to an amount of any deduction allowed under cl. (iv) of sub-s. (1) of s. 35 of the Act. It is true, the legislature has made it clear that if the assets are initially acquired for the scientific research and thereafter if assessee wants to make use of those assets for the business, he can claim the depreciation of the value of the assets which are reduced by the amount of any deduction allowed under cl. (iv) of sub-s. (1) of s. 35. There is no provision in the Act which provides that if the assessee has acquired some assets for the business and after using those assets for business for some time mere entry to transfer those assets from business side to research side, he can get the benefit of deduction under s. 35. Though Mr. Ranka submits that the accounting year was ended on 31st March, 1980, but the ITO has recorded the accounting year in the books as ended on 30th June, 1980. Even in the books of accounts, accounting year was ended on 30th June, 1980, and on that date the entry was reversed and the assets in question were transferred back to the business side. If that is a fact, then on this count assessee is not entitled for any benefit under s. 35 of the Act. Even otherwise if we go by the scheme of the Act, it is clarified in the Explanation to s. 43(1) that the assets which are acquired for the purpose of scientific research and after some time they are transferred to the business side and assessee wants to make use of those assets for business, the depreciation on those assets shall be allowed in the light of Expln. 1 to sub-s. (1) of s. 43 of the Act, but there is no provision for allowing the benefit of s. 35 of the Act to the assets which were initially used for the business for production of the articles and things, in absence of such provisions, the mere entry in the books of accounts from one head to other head in our view does not make the assessee eligible for deduction under s. 35 of the Act, 1961. Moreso for the purpose of depreciation if assessee own the asset is enough but for benefit of allowance under s. 35, the assessee should incur expenditure for scientific research.

In the result, we answer the question in affirmative i.e., in favour of the Revenue and against the assessee. The reference so made stands disposed of accordingly.

[Citation : 254 ITR 652]

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