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TMI Blog1978 (4) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... -73. Hence this appeal by the Dept. 3. The Department's case is that special allowance under s. 35 is placed almost in par with depreciation and the intention of the legislature was to give depreciation only after the use of the assets for scientific research has ceased and it was thus clear that both depreciation and allowance under s. 35 cannot go together. As for the expression 'related to the business carried on by the assessee'. it was contended that for an allowance under s. 35 the asset must be actually used in the business, and that is why the legislature had though that when assets are used for scientific research, it must be given a special allowance under s. 35 and only after it is brought to us e in the business it will be entitled to some depreciation as these assets would then only qualify for depreciation. The Department also submitted that there is a direct decision of the Supreme Court in the case of Liquidators of Pursa Ltd. vs. CIT(1) where it was held that the words 'used for the purpose of business' in s. 10(2)(v) of the I.T. Act, 1922 meant 'used for the purpose of enabling the owner to carry on the business and to earn profits in the business' and that, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use for scientific research and explanation 1 to s. 43 would give no depreciation to the assessee because the written down value, in accordance with that explanation, will be nil and consequently there is no question of considering depreciation. In the light of the same, he contended that there was no need for a separate bar to claim depreciation under s. 35 whereas for assets used in scientific research before 1st April, 1967 a specific provision was necessary because of the possibility of the unavailed portion of the claim under s. 35(2) remaining and, therefore, the full availing of the allowance would not have happened and hence on the left over value of the assets, depreciation had to be provided. According to him such a contingency can arise in the case of assets used for scientific research after 31st March, 1967 because the full allowance would have been granted to the assessee in the very first year in which the capital expenditure on scientific research has been incurred. Having regard to all the above he contended that a fresh and new look on this matter is required. 5. Mr. Padmanabhan, the learned counsel for the assessee, on the other hand contended that it is a misn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further took us through a note with reference to the research and development activities of M/s. Spells Industrial Corporation, of which the assessee is the proprietor, and especially through the following extracts. "With a view to keep of Research and Development separately the Company has purchased a land as early as 15th March, 1972 to put up an exclusive R D Centre and to gain detail technical implication and to pass on the benefit to many Indian and Overseas Industrialist who would like to manufacture Centrifugal Castings and Cylinder Liners. Certain Types of special processing for carrying out Research work which could not be done at the factory premises for want of space and other facilities were carried out initially by putting up a temporary structure on the land purchased. Only because of our consecrated effort ever since the beginning of 1972, we could achieve results which were better than the international standards and which actually put us in a position to supply the technical know-how to the outside parties. The company has an ambitious programme to build up their own constructed building during 1973 and in 1974, they would like to instal some of the equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation on the assets used for scientific research before they ceased to be used for such research. In the right of the same he supported the order of the AAC. 8. We have considered the rival submissions. We find that it is necessary to trace the legislative history regarding the provision allowing expenditure on scientific research related to the business and in particular the capital expenditure incurred on scientific research. As early as in 1945, cl. 3 to the Income-tax and Excess Profits Tax (Amendment) Bill, 1945 brought the amendment to s. 10. Clause (xiv) to s. 10 was inserted and the same appears at page 13 of the Statutes in 13 ITR. That bill was enacted by the Income-tax (Amendment) Act, 1946 and at page 12 of Statutes' part of 14 ITR the new clause, namely, cl. (xiv) to s. 10 occurs. At page 14 the statement of objects and reasons stands as under : "The object of this bill is to give concessions to the tax-payer mainly for the purpose of encouraging the modernisation and rehabilitation of Industry and trade. The proposals include provisions for special initial depreciation allowances in respect of new buildings, plant and machinery, for the allowance of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used for scientific research: Provided that such association, university, college or institution is for the time being approved for the purposes of this clause by the prescribed authority; (iii) any sum paid to a university, college or other institution to be used for research in social, science or statistical research related to the class of business carried on, being a university, college or institution which is for the time being approved for the purposes of this clause by the prescribed authority; (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-S (2). (2) For the purpose of clause (iv) sub-s. (1):- (i) One-fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year and the balance of the expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous years. Explanation Where any capital expenditure has been incurred before the commencement of the business, the aggregate of the expenditure so incurred within the three years immediately proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any) any asset representing expenditure of a capital nature on scientific research: (i) the amalgamating company shall not be allowed the deduction under cl. (ii) or cl. (iii) of sub-s. (2); and (ii) the provisions of this section, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the asset." For asst. years 1968-69 onwards sub-cls. (i) (ia) of sub-s. (2) of s. 35 stood as under: "(2) For the purposes of cl. (iv) of sub-section. (i) in a case where such capital expenditure is incurred before the first day of April, 1967 one fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous year; (ia) in a case where such expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year"; Till 31st March, 1967, even under the present Act, s. 35 continued to remain the same, that is, allowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that purpose and used in the business as for the s. 35 (2) (v). s. 35 (2) (iv) is the section which deals with inadmissibility of depreciation in the same previous year, in regard to assets used for scientific research for which a deduction was allowed for that previous year. 10. It is argued by the assessee's counsel that since this sub-cl. (v) to s. 35(2) related to only assets representing expenditure of a capital nature incurred before the 1st April, 1967, the requirement of ceasing to be used for scientific research is not required in the case of assets, the capital expenditure of which was incurred after 31st March, 1967. In this connection it has to be noticed that prior to 1st April, 1967 corresponding sub-cl. (2) of s. 35 directly referred to sub-cl. (i), which gave allowance of 1/5 of the capital expenditure incurred before 1st April,1967 whereas after 1st April, 1967 sub-cl. (v) refers to assets mentioned in sub-cl. (ii). If we examine the asset, referred to in sub-cl. (ii), it is noticed that this deals with an asset representing expenditure of a capital nature incurred before the 1st day of April, 1967 and used in the business after it ceased to be used for scien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scientific research it is obvious that depreciation cannot be admissible so long as it has not ceased to be used for scientific research. As against that the assessee's counsel's argument is that the fact that under cl. (iv) of s. 35(2), deduction has been made available only in the year in which the expenditure has been claimed, it would follow that depreciation would be admissible unless it came under sub-cl. (v). In our opinion first attention should be paid to the scheme of the s. 35(1)(i) deals with any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. If the language has been "any expenditure, not being in the nature of capital expenditure, laid out or expended on scientific research for the purpose of the business", there was no need for this clause because it would be allowable under s. 37(1). The legislature has advisedly used the expression "related to the business". This is because of the necessity to pin-point the scientific research carried out in connection with the business carried on in contrast to other business. It may happen that a scientific research may be set up for other business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) the assessee's counsel wants us to infer that in case of assets which have not ceased to be used for scientific research the depreciation would have been admissible subject to the limitation prescribed within s. 35(2)(iv). We are unable to accept this argument because sub-cl. (iv) was there even prior to the amendment bringing capital expenditure incurred after 31st March, 1967. Further in the same previous year when the expenditure has been incurred and allowed as deduction there can be a case when the assets ceased to be used for scientific research and used in the business and depreciation would become available because the assets have been used in the business but the legislature did not want to give the double allowance. As far as subsequent years are concerned there will be no scope for any depreciation in terms of Expln. 1 to s. 43(1), which we have extracted elsewhere, because the written down value at the beginning of the subsequent year will be nil as the actual cost of the asset would have to be reduced by the amount of deduction to which the assessee was entitled and which the assessee would have got. Thus there was no need for a sub-clause like 35(2)(v). 13. Sti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv) but there is no specific bar provided for subsequent years where no allowance under s. 35(2) (1-a) is available. With great respect we are unable to agree with this view because if we accept the proposition that the assets representing expenditure of a capital nature used for the scientific research relating to the business would mean assets used for the purpose of the business, there was no need for a clause like cl. (v) of s. 35(2) because depreciation would have been admissible even if the asset had not ceased to be used for scientific research, on the footing that the assets had been used for the purpose of business, and there would therefore be no need to provide for depreciation only if the assets had ceased to be used for scientific research relating to the business. In other words because depreciation was not admissible when the assets were used for scientific research relating to the business, it had to be provided that depreciation would be admissible when it ceased to be used for scientific research. Further the difficulty would be that there will be anomoly in arriving at the written down value. The assessee has to go on claiming depreciation because the asset had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Secretary, Dept. of Science and Technology, Govt. of India shows that the technical know-how of the assessee for the manufacture of Centrifugal Castings was being given to M/s Unicorn Pvt. Limited, Madras and also that Ceylon Transport Board of Srilanka were negotiating for setting-up of a Foundry for the manufacture of Centrifugal Castings and Cyclinder Liners and allied products. Therefore, it appears to us that the assessee had set up this scientific research unit for the purpose of developing technical know-how and passing the same for domestic and export market. Therefore, it is clear that it is an exclusive unit for the purpose as set out in the aforesaid letter and such being the case, the exclusive use of the assets in that unit for scientific research and development cannot be treated as being used for the purpose of the business. As we have already stated, use in the business should be understood in contrast to the use in the research and development wing and related to the business should be construed as the research unit being set up with reference to the business carried on by the assessee. 15. To sum up: (i) In the light of the 'notes on clauses' to the Stateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted. Merely because certain depreciable assets, forming part of the capital expenditure would not get depreciation alone with the allowance it cannot be said to act as deterrent to the incentive because such depreciable assets would get the allowance in a shorter time than by means of depreciation allowance. It is significant to note that similar clauses as in ss. 35(2)(iv) and 35(2)(v), the former putting a bar to claim depreciation in the same year and the latter providing for depreciation only after the assets ceased to be used for scientific research relating to the business, were there both in the old Act and also before 31st March, 1967. When the same provisions are retained, when in relating to the period, depreciation could be claimed only after the assets ceased to be used for scientific research and used in the business, it cannot be said that cl.(iv) to s. 35(2) should be given two different meanings-one for the purpose of assets prior to 31st March, 1967 and the other for assets after 1st April, 1967. It is further significant to notice that the definition of 'original cost' has been added when provision for allowance on expenditure for the purpose of scientific re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are of the view that s. 35 is to apply to cases of scientific research set up as independent units and it must be in relation to the business carried on by the assessee in order to be eligible for deduction in that business and, therefore, so long as those assets are used for scientific research it cannot be said that they are used in the business. Once they cease to be used for scientific research and if they are used in the business then only depreciation has been provided. We have already explained how in the case of such assets representing expenditure incurred after 31st March, 1967, no depreciation can arise and in the case of assets representing expenditure incurred before 1st April, 1967 depreciation can arise under sub-cl.(v) to s. 35(2). Having regard to the above we are unable to agree with the views expressed by the Tribunal earlier on which reliance has been placed by the assessee. On the other hand we hold that no depreciation is admissible in the case of post 31st March, 1967 assets, where only deduction under s. 35(2)(1-A) alone would be admissible. 18. In the result, we reverse the order of the AAC and allow the Departmental appeal. - - TaxTMI - TMITax - I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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