1981 (8) TMI 24 - HC - Income Tax

Summary

Issues involved: The judgment involves two main issues: (1) Allowance of research expenses incurred by the assessee, and (2) Treatment of foreign traveling expenses as capital expenditure.

Research Expenses Issue:
The Income-tax Appellate Tribunal referred two questions for consideration: (1) Whether the assessee was entitled to the allowance of research expenses, and (2) Whether foreign traveling expenses were rightly treated as capital expenditure. The High Court found that the two questions were separate and not interconnected, following the Supreme Court's decision in CIT v. V. Damodharan [1980] 121 ITR 572, which deemed such a reference incompetent if the questions were not interconnected. Therefore, the High Court focused its discussion on the first question referred by the Commissioner.

The assessee claimed Rs. 2,55,837 as research expenses for the assessment year 1965-66. The expenditure was related to research on pulping of bamboo and conversion into yarn, conducted by the International Paper Company in the USA. The Income Tax Officer (ITO) disallowed the claim, stating that the expenditure was not related to the assessee's business of manufacturing rayon yarn, tyre cord, and chemicals. The Appellate Authority Commission (AAC) upheld the disallowance, but the Tribunal disagreed. The Tribunal held that the research was related to the business of the assessee and allowed the deduction under section 35(1)(i) of the Income Tax Act, 1961.

The High Court supported the Tribunal's decision, stating that the research did not need to be conducted by the assessee itself, as long as it was for or on behalf of the assessee. The Court also rejected the argument that the research must be directly related to the present business activities of the assessee, emphasizing that the research for substitution of raw materials was indeed related to the business. Therefore, the High Court concluded that the assessee was entitled to the deduction under section 35(1)(i) of the Income Tax Act.

In conclusion, the High Court answered the question in favor of the assessee, affirming the Tribunal's decision and directing the Commissioner to pay the costs of the reference to the assessee.

Foreign Traveling Expenses Issue:
The judgment did not delve into the details of the treatment of foreign traveling expenses as capital expenditure, as the High Court focused its discussion solely on the research expenses issue referred by the Commissioner.