1989 (6) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Calculation of statutory deduction u/s 36(1)(viii) of the Income-tax Act, 1961.
2. Inclusion of accrued interest from Malabar Spinning and Weaving Mills Co. Ltd. in the income of the assessee.
3. Deduction of expenditure on investigation, research, and feasibility study as revenue expenditure.

Summary:

Issue 1: Calculation of Statutory Deduction u/s 36(1)(viii)
The Tribunal held that the statutory deduction u/s 36(1)(viii) should be calculated on the total income before the deduction of the amount allowable under the same section. This decision was based on the precedent set by the Patna High Court in CIT v. Bihar State Financial Corporation [1983] 142 ITR 518. The High Court affirmed this view, stating that the total income for the purpose of deduction u/s 36(1)(viii) must be computed before allowing the deduction under the same section. The Court found no reason to reconsider this decision despite the Revenue's reference to Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC).

Issue 2: Inclusion of Accrued Interest from Malabar Spinning and Weaving Mills Co. Ltd.
The Tribunal concluded that the interest due from Malabar Spinning and Weaving Mills Co. Ltd. should not be included in the assessee's income for the assessment years 1976-77 and 1977-78. The Tribunal's decision was based on the financial position of the debtor company and the improbability of recovering the interest. The High Court upheld this decision, referencing the principle of "real income" as discussed in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), which emphasizes that only income that has genuinely accrued or arisen should be taxable.

Issue 3: Deduction of Expenditure on Investigation, Research, and Feasibility Study
The Tribunal allowed the deduction of expenditure on investigation, research, and feasibility study as revenue expenditure, following its earlier decision for the assessment year 1975-76. The High Court confirmed this view, citing its own decision in CIT v. Kerala State Industrial Development Corporation Ltd. (No. 1) [1990] 182 ITR 62, which held that such expenditures are revenue in nature and thus deductible.

Conclusion:
All three questions were answered in the affirmative, in favor of the assessee and against the Revenue. The statutory deduction u/s 36(1)(viii) should be calculated on the total income before the deduction itself, the accrued interest from Malabar Spinning and Weaving Mills Co. Ltd. is not includible in the income, and the expenditure on investigation, research, and feasibility study is deductible as revenue expenditure.