Judgment:
A. Pasayat, J.
1. On being moved by an application under Section 256(1) of the Income-tax Act, 1961 (in short, 'the Act'), by the Belpahar Refractories Ltd. (hereinafter referred to as 'the assessee'), the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (hereinafter referred to as 'the Tribunal'), has referred the following question for the opinion of this court :
'Whether on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the claim of the assessee-company in terms of Section 35(2) of the Act to the extent of Rs. 4,59,691 as aforesaid ?'
2. The background facts as culled out from the statement of case are as follows :
The assessee is a limited company. For the assessment year 1980-81 relevant to the accounting year ending on October 31, 1979, the assessee claimed deduction of Rs. 44,74,837 under Section 35(2)(ia) of the Act for a pilot plant for the research and development laboratory. The Income-tax Officer, Ward A, Sambalpur, found that the amount of Rs. 4,59,691 was the opening balance carried forward as work-in-progress from the earlier year. He was of the view that the capital expenditure incurred in any previous year is to be allowed for that previous year and, as such,the aforesaid amount of Rs. 4,59,691 having been incurred in the earlier year was not allowable as deduction. The assessee questioned the correctness of the view in appeal before the Commissioner of Income-tax (Appeals), Orissa. On examination of the materials on record, the Commissioner of Income-tax (Appeals) was of the opinion that the amount was debited to the work-in-progress account when the running bills of the contractors were received, and payments were made against them, and not as merely advances without execution of the work. He found that the cost of materials was also debited as and when they were drawn from the stores and utilised in the job. He upheld the order of the Income-tax Officer. The assessee carried the matter in appeal (in I. T. A. No. 133/(CTK) of 1983) before the Tribunal which affirmed the view of the lower forums. On being moved by the assessee (in R. A. No. 18/(CTK) of 1986), the question set out above has been referred to this court for opinion.
3. The stand of the assessee is that the expression 'the whole of such capital expenditure' in Clause (ia) of Section 35(2) of the Act goes to show that the deduction was to be made on the whole of the capital expenditure on a capital asset and not on part of such expenditure. It is submitted that the spirit of the legislation was to promote in-house research and carry forward of previous expenditure in previous years is not taboo, when the capital asset is finally brought into existence in a subsequent year. It is contended that the normal practice of the assessee-company was to debit expenditure in the work-in-progress account of a particular project and carry forward such expenditure during the pendency of its construction and to transfer the total amount spent to the respective capital expenditure account in the year in which the construction is completed. It was, according to it, a sound accounting principle. Learned counsel for the Revenue supported the conclusions of the authorities.
4. In the case at hand, the payments were made against running bills for work actually performed and it was not established that any part of the payments represented advance for which the concerned contractor had not done any job. Amounts were debited to the work-in-progress account when the running bills of the contractors were received or payments were made against them. The cost of materials was debited as and when they were drawn from stores and utilised in any job. The Tribunal enquired about the bills of the contractors to satisfy itself about the nature of work done. But the details of the bills were not filed, instead, statements regarding the bills, the amounts, etc., were furnished.
4. The relevant provision reads as follows :
'35. Expenditure on scientific research,--. . . .
(2) For the purposes of Clause (iv) of Sub-section (1),-- ....
(ia) in a case where such capital 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 :
Provided that no deduction shall be admissible under this clause in respect of any expenditure incurred on the acquisition of any land, whether the land is acquired as such or as part of any property, after the 29th day of February, 1984.
Explanation 1.--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 preceding the commencement of the business shall be deemed to have been incurred in the previous year in which the business is commenced ;
Explanation 2.-For the purposes of this clause,--
(a) 'land' includes any interest in land ; and
(b) the acquisition of any land shall be deemed to have been made by the assessee on the date on which the instrument of transfer of such land to him has been registered under the Registration Act, 1908 (16 of 1908), or where he has taken or retained possession of such land or any part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882), the date on which he has so taken or retained possession of such land or part;'.
5. The words 'incurred in any previous year' in Clause (ia) go to negative the contention of the assessee. These words categorically lay down that the entire capital expenditure incurred in any previous year can be deducted for that previous year only. These words exclude the possibility of any confusion as to whether the capital expenditure incurred in any preceding year can be deducted in the previous year or not. The word 'incur' means to become liable to, e.g., to incur debt, loss, etc. When an expenditure is said to have been incurred, it may connote actual payment or it could be that the person concerned has merely become liable for payment but has not actually made the payment. When a person has made advance payment but has not become liable for the payment, he cannot be said to have incurred any expenditure. As observed by the apexcourt in Laxminarayan v. Returning Officer, AIR 1974 SC 66, the word 'incur' means actually spent. If the Legislature had intended that the capital expenditure on a capital asset could be carried forward to a subsequent year when the capital asset was finally brought into existence, there was no necessity for use of the expressions 'in any previous year' and 'for that previous year'. The provisions of the clause concerned make it abundantly clear that the expenditure incurred in any previous year can be considered for that previous year only. The Tribunal found substance in the alternative submission of the assessee that it was entitled to depreciation on the concerned amount which position was also accepted by the Departmental representative and, accordingly, the Tribunal directed the Income-tax Officer to allow depreciation in accordance with law.
6. In the aforesaid premises, the Tribunal was justified in disallowing the claim. The answer to the question is in the affirmative, against the assessee and in favour of the Revenue. No costs.
R.K. Patra, J.
7. I agree.