2002 (2) TMI 98 - HC - Income Tax

Summary

Issues:
Interpretation of section 35 of the Income-tax Act, 1961 regarding deduction of expenditure on scientific research.

Analysis:
The case involved a dispute regarding the deduction of an amount representing the written down value of assets transferred by the assessee-company from business use to scientific research use. The assessee claimed this amount as expenditure on scientific research for the assessment year 1980-81. The Assessing Officer initially denied the claim, stating that the assets were acquired in earlier years and merely transferring them to the research department did not qualify as expenditure for scientific research.

The Commissioner of Income-tax (Appeals) allowed the claim, but the Tribunal upheld the Assessing Officer's view. The Tribunal reasoned that the assets were not acquired in the relevant year, and there was no evidence of scientific research conducted using these assets after the transfer. The Tribunal emphasized that section 35 requires actual expenditure on scientific research, not just a book entry transferring assets.

The appellant's counsel argued that the transfer entry constituted expenditure on scientific research, citing relevant case law. However, the Department's counsel contended that since there was no actual expenditure on research and the assets were used for business purposes, the deduction under section 35 was not applicable.

The court analyzed the provisions of section 35 and explained that the legislative intent was to allow deductions for actual expenditure on scientific research. Mere transfer of assets between business and research departments without conducting any research did not qualify as expenditure under section 35. The court also highlighted the importance of actual usage of assets for research purposes to claim the deduction.

The court referred to Explanation 1 to section 43(1) of the Act, which clarifies the treatment of assets used for scientific research and then transferred to business use. The court emphasized that the Act did not provide for claiming deductions under section 35 for assets initially used for business purposes. Therefore, the court ruled in favor of the Revenue, stating that the mere book entry of transferring assets did not entitle the assessee to a deduction under section 35 of the Income-tax Act, 1961.

In conclusion, the court answered the referred question in favor of the Revenue, upholding the Tribunal's decision against the assessee.