1988 (2) TMI 92 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenditure on research and development under Section 35.
2. Denial of depreciation on capital expenditure for research and development.
3. Charging of interest under Section 139(8) and Section 217.

Detailed Analysis:

1. Disallowance of Expenditure on Research and Development Under Section 35:

The first ground of appeal concerns the disallowance of Rs. 15,83,209 on account of research and development expenditure claimed under Section 35. The assessee, a corporation set up to promote and develop electronic industries in U.P., argued that the expenditure was for business purposes and hence deductible. The assessing officer denied this claim, stating that the corporation derived income from other sources like interest and dividends, and not from business activities. The officer also noted that the scientific research was not related to the business carried on by the assessee. The CIT(A) upheld this view, asserting that the subsidiary companies were independent units and the research did not relate to the business of the assessee corporation.

The assessee contended that Section 35 allows deductions for scientific research, even if the research results are used by subsidiaries. The assessee emphasized that the main object of the corporation was to promote electronic industries, which inherently involved research and development. The assessee cited the Bombay High Court decision in CIT v. National Rayon Corpn. Ltd., which allowed similar deductions under Section 35(1)(i).

Upon review, the Tribunal found substantial merit in the assessee's arguments. The memorandum of association clearly outlined the corporation's objective to promote and develop the electronics industry, including research and development activities. The Tribunal held that the expenditure on scientific research was indeed related to the business of the assessee and was therefore deductible under Section 35. The Tribunal also noted that the assessee was recognized by the Department of Science and Technology, which further supported the claim. Consequently, the Tribunal allowed the claim of the assessee.

2. Denial of Depreciation on Capital Expenditure for Research and Development:

The second issue was the denial of depreciation on the capital expenditure of Rs. 15,83,209 used for research and development. The CIT(A) dismissed this claim, arguing that the assessee did not carry on research and development for its own benefit or as a commercial unit.

The Tribunal, however, linked this issue to the first one. Since the Tribunal had accepted that the assessee was entitled to the benefits under Section 35, it logically followed that depreciation on the plant and machinery used for research and development should also be allowed. The Tribunal directed the assessing officer to reassess the depreciation claim, ensuring that all prerequisite conditions were met and providing the assessee a reasonable opportunity to be heard.

3. Charging of Interest Under Section 139(8) and Section 217:

The final issue was the charging of interest under Section 139(8) and Section 217. The CIT(A) referred to a decision of the Allahabad High Court and directed the assessing officer to allow reductions in interest charges corresponding to any relief granted in the appellate order.

The Tribunal found no need for further directions on this matter, as the CIT(A)'s instructions were clear and adequate.

Conclusion:

In summary, the Tribunal allowed the appeal filed by the assessee, granting relief on all contested grounds. The disallowance of research and development expenditure was overturned, depreciation on related capital expenditure was to be reassessed, and interest charges were to be adjusted in line with the reliefs granted.