2005 (2) TMI 57 - HC - Income Tax

Allowance of the expenditure incurred on scientific research - Whether Tribunal was, in law, justified in allowing the relief on account of depreciation on capital expenditure on the cost of machinery and plant used for carrying out research and development? - expenditure on scientific research under section 35 is allowable when such expenditure is laid out or expended or related to the business - It is not in dispute that the respondent/assessee had derived income from consultancy services, preparation of feasibility report and other connected activities. Thus it had carried on business during the assessment year in question and was entitled for allowance of the expenditure incurred on scientific research which was related to its business Question is answered in the affirmative, i.e., in favour of the assessee

Summary

Issues:
Allowance of depreciation on capital expenditure for research and development.

Analysis:
The case involved a question of law regarding the allowance of depreciation on capital expenditure for research and development under section 256(1) of the Income-tax Act, 1961. The respondent, a Government of U.P. undertaking, had transferred its factories to subsidiaries and was engaged in research and development activities. The respondent claimed deduction under section 35 of the Act for expenditure on scientific research. The Assessing Officer disallowed the claim, stating that as the respondent derived income from other sources, the expenditure was not allowable. The Commissioner of Income-tax (Appeals) confirmed the disallowance, leading to an appeal before the Tribunal.

The Tribunal considered the respondent's activities, including providing consultancy services and preparing feasibility reports for electronic industries. It noted that the respondent was recognized by the Government of India for research and development activities. The Tribunal found that the respondent was carrying out research and development operations related to its business objectives. It also observed that the respondent's main source of income was consultancy charges for setting up electronic industries, justifying the claim for deduction under section 35 of the Act.

The Revenue argued that as the respondent had transferred its factories and ceased manufacturing activities, the expenditure on research and development was not admissible. However, the respondent contended that it continued to be engaged in business by providing consultancy services and feasibility reports for electronic industries. The High Court held that the term "business" should be interpreted broadly to include consultancy services, especially in the context of rapid advancements in science and technology. As the respondent derived income from business activities, including consultancy services, it was entitled to claim the expenditure on scientific research related to its business.

In conclusion, the High Court found no legal infirmity in the Tribunal's decision to allow the claim for depreciation on capital expenditure for research and development. The Court ruled in favor of the assessee, stating that the expenditure was related to the respondent's business activities. The judgment emphasized the broad interpretation of the term "business" to encompass consultancy services and upheld the respondent's entitlement to the deduction under section 35 of the Income-tax Act, 1961.