1978 (4) TMI 131 - AT - Income Tax

Issues Involved:
1. Depreciation on assets used for scientific research.
2. Interpretation of Section 35(2)(iv) and Section 35(2)(v) of the Income Tax Act.
3. Legislative history and intent behind Section 35.
4. Eligibility for depreciation on assets used for scientific research after they cease to be used for such purposes.

Issue-wise Detailed Analysis:

1. Depreciation on assets used for scientific research:
The assessee claimed depreciation on assets used for scientific research, which was initially disallowed by the ITO on the grounds that the assets had not ceased to be used for research purposes. The AAC accepted the assessee's plea for depreciation, correcting the amount to Rs. 73,671, relying on a previous Tribunal order. The Department appealed, arguing that depreciation should only be allowed after the assets cease to be used for scientific research and are used in the business.

2. Interpretation of Section 35(2)(iv) and Section 35(2)(v) of the Income Tax Act:
The Department argued that Section 35(2)(iv) restricts the allowance of depreciation to the year in which an allowance under Section 35(1)(iv) is granted, but not in subsequent years. The Department contended that the legislative intent was to provide a special allowance for scientific research and only allow depreciation after the assets are used in the business. The assessee's counsel argued that assets used for scientific research related to the business should be considered as used for the purpose of the business, thus eligible for depreciation.

3. Legislative history and intent behind Section 35:
The Tribunal traced the legislative history of Section 35, noting that it was introduced to encourage modernization and rehabilitation of industry and trade. The provision aimed to prevent double allowances or excessive allowances. The Tribunal examined the amendments to Section 35, particularly the changes brought by the Finance (No.2) Act of 1967, which allowed the entire capital expenditure on scientific research to be deducted in the year it was incurred.

4. Eligibility for depreciation on assets used for scientific research after they cease to be used for such purposes:
The Tribunal held that depreciation is admissible only after the assets cease to be used for scientific research and are used in the business. The Tribunal emphasized that the legislative intent was to provide an incentive for capital expenditure on scientific research by allowing full deduction in the first year, and thus, no depreciation should be allowed before the assets cease to be used for research. The Tribunal disagreed with the earlier Tribunal decision that allowed depreciation on assets used for scientific research, stating that it would lead to anomalies in determining the written down value.

Conclusion:
The Tribunal concluded that Section 35 applies to scientific research set up as independent units related to the business carried on by the assessee. Depreciation is only admissible after the assets cease to be used for scientific research and are used in the business. The Tribunal reversed the AAC's order and allowed the Department's appeal, holding that no depreciation is admissible for assets used for scientific research after 31st March 1967, where only the deduction under Section 35(2)(1-A) is admissible.

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