Bombay High Court
Commissioner Of Income-Tax vs A.L.A. Chemicals (P.) Ltd. on 23 November, 1992
Equivalent citations: [1993]203ITR891(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT Mrs. Sujata Manohar, J.
1. At the instance of the Commissioner of Income-tax, the Appellate Tribunal has referred certain question of law arising out of the decision of the Tribunal under section 256(1) of the Income-tax Act, 1961.
2. The assessee is a private limited company and the assessment year involved is 1974-75. The assessee-company had incurred capital expenditure of Rs. 87,453 for scientific research and development in the assessment years 1972-73 and 1973-74. Deduction under section 35 was allowed at Rs. 76,784 and Rs. 10,669, respectively, in these two assessment years. The assessee also claimed depreciation of Rs. 5,708 on the capital assets used for scientific research and development. This was disallowed.
3. The Income-tax Officer excluded this total amount of Rs. 87,453 from the capital computation for the purposes of deduction under section 80J of the Income-tax Act, 1961. The Appellate Assistant Commissioner, however, allowed this amount to be included in the capital computation for the purpose of section 80J. And he also allowed the assessee's claim for depreciation. The decision has been upheld by the Tribunal. Hence, at the instance of the Commissioner of Income-tax, the following two question of law have been referred to us :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that depreciation allowance under section 32(1) and deduction under section 35(1)(v) of the Act were disjunctive and cumulative and that the assessee-company was entitled to depreciation on the capital expenditure incurred by it on the assets used by it for scientific research and development purposes, and directing the Income-tax Officer to allow full deprecation on such capital assets even though full deduction was given to it on the said assets under section 35 in respect of earlier years and the assets under reference continued to be used for scientific research only ?
2. Whether, on the facts and in the circumstances of the case, and, in particular, having regard to the fact that a full deduction had been allowed to it in respect of the expenditure under section 35 of the Income-tax Act, and the assets in question continued to be used by it only for the purpose of its scientific research, the Appellate Tribunal was right in law in holding that the capital expenditure of Rs. 87,453 that represented the costs of the assets used by the assessee-company on scientific research and development formed part of its capital within the meaning of section 80J of the Income-tax Act and in directing the Income-tax Officer to include it in the computation of its capital within the meaning of the said provision ?
4. In respect of question No. 1, it is agreed between both the parties that, in view of a recent decision of the Supreme Court in the case of Escorts Ltd. v. Union of India, at present reported in [1993] 199 ITR 43; [1992] 2 SCALE 867, a note of which also appears in [1992] 198 ITR (St.) 94, the assessee is not entitled to depreciation allowance under section 32 when he has been granted a deduction under section 35. Hence, the first question is answered in the negative and in favour of the Revenue.
5. The second question relates to the right of an assessee to include the cost of assets used by him for scientific research and development in the capital base of the assessee-company for the purposes of computation of deduction under section 80J of the Income-tax Act, 1961, when full deduction in respect of these assets is granted to him under section 35. The relevant provision which now applies in respect of this question, because of the retrospective amendment inserted in section 80J by the Finance (No. 2) Act, 1980, with effect from April 1, 1972, is as follows :
"80J. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provision of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains.... of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed may be, computed in the manner specified in sub-section (1A)....
(1A) (I). For the purposes of this section, the capital employed in an industrial undertaking or the business of a hotel shall.... be computed in accordance with clauses (II) to (IV)...
(II) The aggregate of the amounts representing the values of the assets as on the first day of the computation period.... shall first be ascertained in the following manner :-
(i) in the case of assets entitled to depreciation, their written down value;
(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee;
(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when then became assets of the business;......
Explanation 1. - In this clause, 'actual cost' has the same meaning as in clause (1) of section 43. ..."
6. In the present case, in view of the Supreme Court judgment in Escorts Ltd. v. Union of India [1993] 199 ITR 43, it is now an accepted position that, in respect of the assets in question which are used for scientific research and development on which deductions granted under section 35, no depreciation can be allowed. Therefore, for the purpose of section 80J, these assets fall in category (ii) of section 80J(1A)(II) since these are assets which are acquired by purchase and are not entitled to depreciation. Therefore, for the computation of capital under section 80J, what has to be taken into account is their actual cost to the assessee.
7. The term "actual cost" has the same meaning as in section 43(1). Section 43(1) provides that :
"'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority...."
8. There is an Explanation to this section which deals with a situation where an asset is used in the business after it ceases to be used for scientific research related to that business. In such a situation, the actual cost is reduced by the amount of deduction allowed on such asset previous under section 35 of the Act. Therefore, ordinarily, the term "actual cost" means at least the price paid by the assessee for purchasing the asset in question, and it is not required to be reduced by the amount allowed as a deduction under section 35. In fact, in a given case, the actual cost any include something more in addition to the price paid by the assessee for the purchase of the asset. Thus, for example, in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, the Supreme Court has considered the meaning of the terms "actual cost". It said (at page 175) :
"The accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition."
9. In the case before it, the Supreme Court included in the actual cost of the asset, interest paid on borrowed capital prior to commencement of production in addition to the price of the assets. Therefore, in any event, the price which the assessee has paid for purchasing the assets will be a part of the actual cost.
10. Mr. Jetly, however, submits that the actual cost to the assessee must be reduced by the deduction which is allowed to him in respect of these assets under section 35 of the Income-tax Act, 1961. In support of his submission, he relies upon the decision of the Supreme Court in Escorts Ltd. v. Union of India [1993] 199 ITR 43. The Supreme Court in that case was concerned with the question whether, under section 35 of the Income-tax Act, 1961 prior to its retrospective amendment, any deduction which was granted would be in addition to the deduction permissible to the assessee under section 32 of the Income-tax Act or whether a deduction granted under section 35 of the Income-tax Act would bar the assessee from claiming any deduction under section 32 of the Income-tax Act. The question which the Supreme Court considered was (at page 54) :
"Were the earlier statutory provision capable of only one interpretation, namely, that placed by the assessees or was there any ambiguity in relation thereto ?"
11. After considering the nature of deduction granted under section 32 and 35, the Supreme Court said (at page 49) :
".... if these two provisions are applied simultaneously, it would result in granting an assessee a double allowance in respect of the same expenditure-one, of the entire amount over a period of five years and the other, a percentage of the expenditure over a number of consecutive years at a graded scale....."
12. It said that deductions under section 32 and 35 were basically of the same nature intended to enable the assessee to write off certain items of capital expenditure against his business profits. It said (at page 57) : ".... if we bear in mind a fundamental though unwritten axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and if it is intended, it will be clearly expressed,. In other words, in the absence of a clear statutory indication to the contrary, the statutes should not be read so as to permit an assessee two deductions".
13. Mr. Jetly places strong reliance on these observations of the Supreme Court and submits that a deduction under section 80J in addition to deduction under section 35 is also double deduction. Hence, applying the ratio of the Supreme Court judgment, the assessee who has had the benefit of a deduction under section 35 should not get a deduction under section 80J by including the cost of the asset in the capital of the company.
14. In our view, however, the observations of the Supreme Court in the case of Escorts Ltd. v. Union of India [1993] ITR 43, will not have any application to the benefit granted to an assessee under section 80J. The Supreme Court, in the case of Escorts Ltd. [1993] 199 ITR 43, was concerned with interpreting the provision of section 32 and section 35. Both these provisions form part of Chapter IV which deals with the computation of total income. While arriving at the total income of an assessee, certain deductions are allowed as set out in the said Chapter itself. Section 29 which forms part of Chapter IV states that :
"The income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to 43C."
15. These sections include, inter alia, deduction of depreciation under section 32 and deduction regarding expenditure on scientific research in the manner set out in section 35. Therefore, the deductions which the Supreme Court was concerned with, were the deductions which were within the scheme of Chapter IV, to be taken into account while computing the income under section 28. Section 80J, on the other hand, forms part of Chapter VI-A, which provides for certain additional deductions which are to be made from the gross total income of the assessee as computed under Chapter IV. Thus for example section 80A provides :
"In computing the total income of an assessee, there shall be allowed from his gross total income.... the deduction specified in sections 80C to 80U."
16. These are additional deductions. They are quite different in kind from deductions which fall under chapter IV. Under section 80J, what is provided is an additional deduction which is calculated as a percentage of the capital employed by the assessee in certain undertakings as set out in section 80J. Section 80J(1A)(II) prescribes the manner of ascertaining the value of such capital assets. The assets which are to be taken into account for computation of capital are also specified in that section. These include under clause (i) of section 80J(1A)(II) assets entitled to depreciation. In that case, their written down value has to be taken into account. It also includes assets which are acquired by purchase and which are not entitled to depreciation, such as assets in the present case. In the case of such assets, we have to take into account the actual cost of such assets to the assessee. Since the assets are acquired by the assessee by purchase, the actual cost would certainly include at least the price of those assets to the assessee, though it may also include something more as we have pointed out earlier. This section also includes something more as we have pointed out earlier. This section also includes in addition, assets which may be acquired by an assessee otherwise than by purchase which are not entitled to depreciation. These may be assets which may be gifted to the assessee. Their actual cost to the assessee is nil. Yet their value is also required to be taken into account under clause (iii) of section 80J(1A)(II). In their case, the value of the assets when they become assets of the business has to be taken into account. Therefore, the question whether the assessee has expended any amount for the acquisition of those assets or whether he has been reimbursed in respect of such expenditure indirectly by reason of any tax benefit which he may have got or whether the assets are gifted to the assessee is not strictly relevant for the purpose of section 80J except to the extent so specified. What we have to ascertain is whether the assets as such are includible in the computation of capital. If so, their value is to be ascertained as set out in section 80J(1A)(II).
17. In such a situation, there is no question of any double deduction of the nature contemplated by the Supreme Court in Escorts Ltd.'s case [1993] 199 ITR 43. In fact, the Supreme Court has made this clear (page 874 of [1992] 2 Scale) when it says that the two deductions, i.e. deductions under sections 32 and 35 are (at page 59 of 199 ITR) : "basically of the same nature intended to enable the assessee to write off certain items of capital expenditure against his business profits". A deduction under section 80J is not of the same nature as a deduction under section 35. Therefore, in our view, the ratio of the Supreme Court judgment in Escorts Ltd.'s case [1993] 199 ITR 43, will not apply to the computation of capital under section 80J for the purpose of determining the quantum of deduction under section 80J.
18. Mr. Mistri, the learned advocate for the assessee, has also pointed out that, if the actual value of the assets has to be determined with reference to the cost of these assets less various permissible deductions under Chapter IV of the income tax Act, 1961, even in the case of an asset on which depreciation is allowed, one can say that, ultimately, the entire value of the assets will be reduced to nil over a period of time. There, in the case of such assets also, if ultimately, the assessee is going to get a full deduction, he should not have been allowed any deduction under section 80J on the basis of the written down value of such assets. The argument is attractive. But we need not go to the length of accepting it. Because even otherwise, looking to the scheme under section 80J, there is a clear provision for the assets which have to be taken into account and the manner in which the value of such assets has to be determined. This does not take into account any indirect reduction in the cost of such assets to the assessee by any deduction which may be allowed to him on such assets under section 35.
19. Our attention in this connection was also drawn to section 43(1) which is incorporated in section 80J by virtue of Explanation 1 to section 80J(1A). Under section 43(1) actual cost is defined to mean "the actual cost of the assets to the assessee, reduced by the portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority". The definition does not include any reduction in such cost by virtue of a deduction such as under section 35. Therefore, in the present case, actual cost has to be determined as he price paid by the assessee for the assets. Explanation 1 to section 43(1) provides :
"Where an asset is used in the business after it ceases to be used for scientific research related to the business, and a deduction has to be made under clause (ii) of sub-section (1) of section 32 in respect of that asset, the actual cost of the asset to the assessee shall be the actual cost to the assessee as reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of section 35...."
20. Hence, but for this Explanation, the actual cost to the assessee in such a situation would not have been so reduced. This Explanation also reinforces the submission made on behalf of the assessee that, ordinarily, actual cost does not take into account the deduction allowed to an assessee under section 35. The actual cost must be taken to mean the actual cost of the asset to the assessee reduced only to the extent provided in section 43(1) and not in any other manner. In this connection, we may also point out that, in the case of CIT v. Warner Hindustan Ltd. [1986] 160 ITR 217, the Andhra Pradesh High Court has observed (at page 227) :
"The mere fact that deduction is given for the purpose of computing taxable income under section 35, does not mean that the asset used for scientific research ceases to be an asset or that it ceases to be capital employed."
21. Another Division Bench of this court (to which one of us. Mrs. Sujata Manohar J., was a party) has taken a similar view in the case of Pyrene Rai Metal Treatment Ltd. [1993] 203 ITR 752 (Bom) Income-tax Reference No. 315 of 1977, Mrs. Sujata Manohar and B. N. Srikrishna JJ., in the judgment and order dated November 5, 1992), albeit without noticing the judgment of the Supreme Court in Escorts Ltd's case [1993] 199 ITR 43. In the premises, question No. 2 is answered in the affirmative and in favour of the assessee. Both the question are answered accordingly.
22. In the circumstances, there shall be no order as to costs.