2003 (1) TMI 740 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee can claim a loss under the head "capital gains" on the sale of assets used for scientific research, where the entire cost has been allowed as a deduction under section 35 of the Income-tax Act.
2. Whether the loss on the sale of R&D assets can be allowed as a business loss.
3. Whether the assessee is entitled to set off the capital loss against business income.
4. Whether investment allowance on plant and machinery written off is applicable.
5. Whether the adjusted profit for the purposes of section 80HHC of the Act is negative, disallowing the deduction under section 80HHC.

Issue-wise Detailed Analysis:

1. Claim of Loss under "Capital Gains":
The assessee incurred capital expenditure on building, equipment, and furniture used in its scientific research center, claiming a 100% deduction under section 35(1)(iv) read with section 35(2)(ia) of the Income-tax Act. These assets were sold in the year under consideration, and the sale consideration was assessed under section 41(3). The assessee claimed the difference between the indexed cost and the sale consideration as a long-term capital loss. The Assessing Officer rejected this claim, stating that since the entire cost was allowed as a revenue expense, the actual cost became zero, and thus, the sale proceeds should be taxed as income under section 41(3). The CIT(A) upheld this view, emphasizing the clear provisions of section 41(3) and the principle that taxing statutes should be strictly construed.

2. Loss on Sale of R&D Assets as Business Loss:
The assessee also claimed the loss as a business loss. The Assessing Officer rejected this claim, arguing that the assets were business assets, and since 100% revenue expenses were allowed on these assets, the actual cost was zero. Therefore, any sale proceeds should be taxed as revenue receipts. The CIT(A) supported this view, noting that the assessee's claim for set off of the alleged capital loss against business income violated the provisions of section 71(3) applicable from the assessment year 1992-93 onwards.

3. Set Off of Capital Loss against Business Income:
The CIT(A) confirmed the Assessing Officer's action in rejecting the set off of the capital loss against business income. The CIT(A) reiterated that the provisions of section 71(3) specifically prohibit setting off the loss under the head "capital gain" against income under any other head. The Tribunal also upheld this view, emphasizing that the loss is specifically provided to be assessed under the head "capital gain," and thus, cannot be allowed as a business loss.

4. Investment Allowance on Plant and Machinery Written Off:
The ground pertaining to investment allowance on plant and machinery written off was not pressed by the assessee and was accordingly rejected.

5. Adjusted Profit for Section 80HHC Deduction:
The assessee claimed a deduction under section 80HHC, which the Assessing Officer denied, stating that the adjusted profit, after deducting 90% of capital incentive, interest received, rent, and financial charges, resulted in a negative figure. The CIT(A) upheld this view, and the Tribunal also found no material to justify a contrary view, thus rejecting this ground of appeal.

Conclusion:
The Tribunal allowed the loss under the head "capital gain" to the extent of the indexed cost but rejected the claim of allowing the loss as a business loss and the set off of the capital loss against business income. The claims regarding investment allowance and section 80HHC deduction were also rejected, leading to a partial allowance of the appeal.