Judgment:
A. Pasayat, J.
1. These two reference applications are interlinked since they relate to the assessment years 1978-79 and 1979-80, involving a common dispute. On being moved by the Revenue by applications under Section 256(1) of the Income-tax Act, 1961 (in short, 'the Act'), the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (in short, 'the Tribunal'), has referred the following question for opinion :
'Whether, in the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in allowing the claim of the assessee for depreciation on scientific research and development equipment?'
2. Messrs. Belpahar Refractories Private Limited (hereinafter referred to as 'the assessee'), filed its return of income for the assessment years 1978-79 and 1979-80. During the said assessment years, it claimed depreciation at the rate of ten per cent. on research and development equipment valued at Rs. 11,16,404 and Rs. 10,73,826, respectively. The Income-tax Officer, Ward 'A', Sambalpur, and the Inspecting Assistant Commissioner, Income-tax (Assessment), Bhubaneswar, who made the assessments, rejected the assessee's claim for these years holding that the research and development equipment did not fall within the category of 'plant' so as to entitle the assessee to the benefit of depreciation. A reference was made to the definition of the words 'actual cost' of an asset as per Explanation 1 to Section 43(1) and it was observed that the scientific research equipment is not to be taken at par with other assets entitled to depreciation. In appeal, the Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow depreciation claimed by relying on. an order of the Tribunal, Calcutta Bench, in the case of one Messrs. Vidyut Metalics Ltd. In further appeal, the Tribunal affirmed the order of the Commissioner of Income-tax (Appeals) on the basis of a Special Bench decision of the Tribunal in the case of ITO v. Vickars Sparry of India in I. T. A. Nos. 2035 and 2036/(Bom) of 1977-78. On being moved under Section 256(1) of the Act, the Tribunal has referred the aforesaid question for our opinion.
3. For the resolution of the dispute, it is necessary to refer to the relevant provisions of Section 35(1)(iv) and Section 35(2)(iv), which read as follows:
'35. Expenditure on scientific research.--(1) In respect of expenditure on scientific research, the following deductions shall be allowed--....
(iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deductions as may be admissible under the provisions of Sub-section (2) :
Provided that the scientific research association, university, college or other institution referred to in Clause (ii) or Clause (iii) shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of approval, or continuance thereof, under Clause (ii) or, as the case may be, Clause (iii) :
Provided further that the prescribed authority may, before granting approval under Clause (ii) or Clause (iii), call for such documents (including audited annual accounts) or information from the scientific research association, university, college or other institution as it thinks necessary in order to satisfy itself about the genuineness of the activities of the scientific research association, university, college or other institution and that authority may also make such inquiries as it may deem necessary in this behalf :
Provided also that any notification issued by the prescribed authority under Clause (ii) or Clause (iii) shall, at any one time, have effect for such assessment year or years, not exceeding three assessment years (including an assessment year or years commencing before the date on which such notification is issued) as may be specified in the notification.
(2) For the purposes of Clause (iv) of Sub-section (1),--. . . . (iv) where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under Clause (ii) of Sub-section (1) of Section 32 for the same or any other previous year in respect of that asset ;....'
4. The provision which was contained between the parenthesis was inserted by the Finance (No. 2) Act of 1980 (Act 44 of 1980), with retrospective effect from April 1, 1962. Previously the expression used was 'for the same previous year'. The words 'any other previous year in respect of that asset' have changed the situation completely. The amended provision provides that, where a deduction is allowed for any previous year under Section 35 in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under Clause (ii) of Sub-section (1) of Section 32 for the same or any other previous year in respect of that asset. Section 32 deals with depreciation. Once 100 per cent. deduction is allowed under Section 35(1)(iv) on the value of a capital asset,the actual cost for the next year is reduced in zero in terms of Section 43(1) of the Act as a result of which there is no scope for allowance of depreciation in the subsequent year. In that view of the matter, the Tribunal was not justified in allowing the claim of the assessee for depreciation on scientific research and development equipment. The Tribunal had not noticed the effect of the change brought in by the Finance (No. 2) Act, 1980.
5. Our answer to the question, therefore, is in the negative, in favour of the Revenue and against the assessee.
6. The references are, accordingly, disposed of. No costs.
D.M. Patnaik, J.
7. I agree.