1986 (1) TMI 136 - AT - Income Tax

Issues Involved:
1. Deduction of pre-production expenses.
2. Depreciation on roads, walls, and fences.
3. Extra-shift allowance for water systems and sanitation.
4. Depreciation on exchange conversion loss capitalized.
5. Claim under Section 35(1)(iv) for capital work-in-progress, machinery, and equipment in transit.
6. Inclusion of capital work-in-progress and plant and machinery in transit.
7. Weighted deduction on commission paid to M/s HMT (International) Ltd.
8. Deductions under Sections 80J and 80HH based on commercial profits.
9. Computation of deduction under Section 80J including the value of capital assets used for scientific research.

Detailed Analysis:

1. Deduction of Pre-Production Expenses:
The Revenue's first ground of appeal was that the CIT(A) erred in directing the IAC to allow a deduction of Rs. 25,826 claimed as pre-production expenses. This ground was rejected based on the Tribunal's previous order in ITA Nos. 735 & 737/Bang/82 dated 5th May 1984, which was confirmed by the High Court on 7th January 1986 in I.T.R.C. No. 294/1979.

2. Depreciation on Roads, Walls, and Fences:
The next ground of appeal concerned the CIT(A)'s decision to allow depreciation on roads, walls, and fences. This ground was also rejected in light of the Tribunal's earlier order in ITA 735 & 737/Bang/82.

3. Extra-Shift Allowance for Water Systems and Sanitation:
The Revenue contended that the CIT(A) erred in directing the IAC to allow extra-shift allowance for water systems and sanitation. This ground was similarly rejected based on the Tribunal's order dated 5th May 1984.

4. Depreciation on Exchange Conversion Loss Capitalized:
The Revenue argued against the CIT(A)'s direction to allow depreciation on exchange conversion loss capitalized. This ground was rejected following the Tribunal's previous decision.

5. Claim Under Section 35(1)(iv) for Capital Work-in-Progress, Machinery, and Equipment in Transit:
The CIT(A)'s direction to admit the assessee's claim under Section 35(1)(iv) for capital work-in-progress, machinery, and equipment in transit was contested. This ground was rejected in light of the Tribunal's earlier order.

6. Inclusion of Capital Work-in-Progress and Plant and Machinery in Transit:
The Revenue's argument that the CIT(A) erred in including the value of capital work-in-progress and plant and machinery in transit was rejected. The Tribunal's previous decision in I.T.R.C. Nos. 40 & 41/84 dated 12th December 1985 confirmed this inclusion.

7. Weighted Deduction on Commission Paid to M/s HMT (International) Ltd.:
The CIT(A) allowed a weighted deduction on a portion of the commission paid to M/s HMT (International) Ltd. under Section 35B. The CIT(A) noted that services rendered by M/s HMT (International) Ltd. fell under sub-clauses (i) and (iv) of Section 35B(1)(b). The Tribunal rejected the Revenue's argument that no expenditure was laid out exclusively for export work, citing the Special Bench's decision in the case of J. Hemchand & Co.

8. Deductions Under Sections 80J and 80HH Based on Commercial Profits:
The CIT(A) held that deductions under Sections 80J and 80HH should be computed based on profits determined on commercial principles after deducting only current depreciation. The Revenue argued that the insertion of Section 80AB by the Finance (No. 2) Act of 1980 required that all depreciation, including unabsorbed depreciation and previous losses, be set off against the gross income. The Tribunal agreed with the Revenue, reversing the CIT(A)'s order.

9. Computation of Deduction Under Section 80J Including the Value of Capital Assets Used for Scientific Research:
The CIT(A) directed the IAC to include the value of capital assets used for scientific research in the computation of deduction under Section 80J. The Revenue argued that the value of these assets should be 'nil' as their cost had already been written off under Section 35(1). The Tribunal agreed with the CIT(A), holding that the assets used for scientific research should be included in the capital computation for Section 80J purposes.

Conclusion:
The appeal was allowed in part. The Tribunal upheld the CIT(A)'s decisions on most grounds but reversed the decision regarding the computation of deductions under Sections 80J and 80HH based on commercial profits.

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