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Issues Involved:
1. Entitlement to deduction u/s 35(1)(iv) on the written down value of assets transferred to the research and development section. Summary: Entitlement to Deduction u/s 35(1)(iv): The primary issue was whether the assessee is entitled to a deduction u/s 35(1)(iv) on the written down value of assets amounting to Rs. 1,71,281 transferred to the research and development section. The assessee, engaged in the manufacture of fasteners for automobiles, transferred certain plant and machinery to its scientific research cell during the accounting year ending March 31, 1975. The Income-tax Officer rejected the claim on the grounds that the expenditure on these assets had been incurred in earlier years and could not be treated as capital expenditure again merely because the assets were transferred to the research and development section in a later year. The Commissioner (Appeals) allowed the assessee's appeal, following a precedent set by the Bangalore Bench of the Tribunal in the case of Bharat Electronics Ltd. The Tribunal upheld this decision, leading to the Department's appeal to the High Court. Arguments by the Department: The Department contended that the Tribunal erred in granting the deduction since the expenditure was not incurred in the assessment year under consideration. They argued that the machinery was purchased in earlier years, and the expenditure should be considered as incurred in those years. The Department relied on several Supreme Court decisions, including Indian Molasses Co. (P.) Ltd. v. CIT and CIT v. Nainital Bank Ltd., to argue that the expenditure must be irretrievably lost in the assessment year to qualify for deduction. Arguments by the Assessee: The assessee argued that the transfer of machinery to the research and development section constituted capital expenditure in the assessment year under consideration. They maintained that the deduction u/s 35(1)(iv) should be allowed on the written down value of the machinery transferred. The assessee also pointed out that the Department had accepted a similar decision in the case of Bharat Electronics Ltd. without filing a reference application. Court's Analysis: The court noted that "scientific research" is defined u/s 43(4) of the Act and that u/s 35(1)(iv) read with section 35(2)(ia), any expenditure incurred on scientific research related to the business is allowed in full in the year it is incurred. The court emphasized that the assessee can incur expenditure either by purchasing new machinery or by transferring existing machinery for scientific research and development. The court found no prohibition in section 35(1)(iv) against transferring assets for scientific research and development. The court distinguished the cited Supreme Court decisions, noting that they related to revenue expenditure and not capital expenditure. The court also referenced the Orissa High Court's decision in Belpahar Refractories Ltd. v. CIT, which supported the view that setting apart machinery for scientific research and development constitutes incurring expenditure. Conclusion: The court concluded that the assessee satisfied all conditions prescribed u/s 35(1)(iv) read with section 35(2) and was entitled to the deduction of its capital expenditure for the assessment year under consideration. The question was answered in the affirmative and against the Department. No costs were awarded.
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