Multi Metals Ltd. Vs. Commissioner of Income-tax - Court Judgment

SooperKanoon Citationsooperkanoon.com/751773
SubjectDirect Taxation
CourtRajasthan High Court
Decided OnFeb-08-2002
Case NumberD.B. Income-tax Appeal No. 31 of 1986
Judge Y.R. Meena and; A.C. Goyal, JJ.
Reported in[2002]254ITR652(Raj)
ActsIncome Tax Act, 1961 - Sections 35 and 43(1)
AppellantMulti Metals Ltd.
RespondentCommissioner of Income-tax
Appellant Advocate N.M. Ranka, Adv.
Respondent Advocate J.K. Singhi, Adv.
Cases ReferredEscorts Ltd. v. Union of India
Excerpt:
- 1. on an application under section 256(1) of the income-tax act, 1961, the tribunal has referred the following question for the opinion of this court:'whether, on the facts and in the circumstances of the case and on interpretation of section 35 of the income-tax act, 1961, the learned tribunal was right in law in not allowing deduction of an amount of rs. 11,53,294 representing the written down value of assets transferred by the assessee-company from the business use to that of scientific research used in the previous year relevant for the assessment year 1980-81 as expenditure on scientific research ?'2. the assessee-company derives income from sale and manufacture of rubes, print rolls, etc. the relevant assessment year is 1980-81. the brief facts in the return filed by the assessee are that the assessee claimed an expenditure of rs. 11,53,294 incurred under the head 'capital' as expenditure relatable to scientific research. this amount included a sum of rs. 11,14,885 which represented the written down value of assets, which assets were acquired earlier and used for the purpose of business but transferred to the scientific research department during the financial year relevant to the assessment year in question.3. the claim of the assessee was that once the assets are transferred from business assets to the assets for scientific research, the assessee is entitled for the benefit of the provision contained in section 35(1)(iv), as the assessee has incurred expenditure for the assets acquired for scientific research. he further submits that the expenses incurred and the cost of the assets can be seen from explanation 1 to section 43(1) of the income-tax act, 1961.4. the assessing officer has negatived the claim of the assessee holding that the assessee has not incurred the expenditure for scientific research, in fact the assets were acquired in the earlier years and this year only there is an entry in the books of account to the effect that these assets are now used for scientific research. the assessing officer further states that the assessee has explained that on march 31, 1979, an entry was passed debiting the research and development expenses by an amount of rs. 11,53,294 and crediting the assets accounts by the same amount in scientific research side. this entry has been reversed on june 30, 1980.5. by debiting the fixed assets account and crediting the research and development account by an amount of rs. 11,53,294 on that count also the assessee is not entitled for benefit of section 35(1)(iv) of the act.6. in appeal before the commissioner of income-tax (appeals), the commissioner of income-tax (appeals) has allowed the claim of the assessee but in appeal before the tribunal, the tribunal has restored the view taken by the assessing officer.7. mr. ranka, learned counsel for the assessee, submits that when the entry was passed on march 31, 1979, debiting the research and development account by an amount of rs. 11,53,294, there is a transfer and that amounts to expenditure on scientific research and the transfer entry of written down value must be treated as cost of the assets within the meaning of explanation 1 to section 43, sub-section (1) of the act. mr. ranka places reliance on the decision of the madras high court in the case of cit v. sundaram fasteners ltd. : [1997]223itr455(mad) . he further places reliance on the decision in the case of cit v. j.k. hosiery factory : [1986]159itr85(sc) and submitted that in that case, unabsorbed depreciation was there of the unregistered firm which was registered next year. in that case their lordships have taken the view that the unabsorbed depreciation can be carried forward and the benefit can be given to the registered firm next year. mr. ranka further submits that in the case of saroj aggarwal v. cit : [1985]156itr497(sc) , their lordships (supreme court) have taken the view that while a partner of the firm died and the firm sustained speculation loss, three days thereafter the widow can run the firm under the provision in the partnership deed regarding continuation of the partnership. their lordships have held that the widow could be said to have succeeded by inheritance and she can claim the set off of loss of her deceased husband sustained by the firm in speculation business against the speculation profit.8. mr. singhi, learned counsel for the department, submits that there is no expenditure in view of the provision of section 35 for the scientific research, therefore, there is no question of allowing the benefit of section 35 in the facts and circumstances of this case. he further submits that the assessing officer has already allowed depreciation to the assessee under section 32 of the act. therefore, there is no question of allowing the assessee the benefit of deduction under section 35 of the act. learned counsel in this connection place reliance on the decision of their lordships (supreme court) in the case of escorts ltd. v. union of india : [1993]199itr43(sc) .9. the facts are not in dispute that the assets in question were not purchased by the assessee in the year under consideration. they were purchased in the earlier year and used for business in the year under consideration. the assessee has made only an entry in the books of account on march 31, 1979, debiting the written down value of those assets from the business assets account and crediting the written down value of the assets in the scientific research side. that entry has been reversed on june 30, 1980.10. mr. ranka submits that the assessing officer has stated that june 30, 1980, was the last day of the accounting year but the last day of the accounting year was march 31, 1980.11. section 35 of the act provides that if the assessee has incurred any expenditure on scientific research, he/it will be eligible for the deduction as provided under section 35 on account of the assets acquired for scientific research.12. the admitted facts of the case are that the assessee has not acquired these assets this year. the machinery was acquired in the earlier year and was used for the purpose of business. this year, only there is an entry in the books of account to transfer these assets from the business side to the scientific research side, whether mere entry is enough to make the assessee eligible for deduction under section 35 of the act. in our view that will be contrary to the scheme of the act of 1961. section 35 requires expenditure on scientific research.13. in the case in hand, nothing has been brought on record as to after transfer of these assets from the business side to the research side, what research the assessee has made with the help of machinery. the use of the machinery was the same as that in the earlier year. earlier the machinery was used for production or manufacturing of goods. if the same use has been made of the machinery in this year, how the assessee can get the benefit of section 35. it cannot be the intention of the legislature that mere entry in the books of account from one head to another head will change the character of the assets for the purpose of allowance.14. mr. ranka, learned counsel for the appellant, brought to our notice explanation 1 to section 43(1) of the act of 1961, which provides that where an asset is used in the business after it ceases to be used for scientific research related to that 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 of the act.15. it is true, the legislature has made it clear that if the assets are initially acquired for the scientific research and thereafter if the assessee wants to make use of those assets for the business, he can claim the depreciation on the value of the assets which are reduced by the amount of any deduction allowed under clause (iv) of sub-section (1) of section 35. there is no provision in the act which provides that if the assessee has acquired some assets for the business and after using those assets for business for some time by mere entry to transfer those assets from the business side to the research side, he can get the benefit of deduction under section 35.16. though mr. ranka submits that the accounting year ended on march 31, 1980, the income-tax officer has recorded the accounting year in the books as ended on june 30, 1980. even in the books of account, the accounting year was ended on june 30, 1980, and on that date the entry was reversed and the assets in question were transferred back to the business side. if that is a fact, then on this count the assessee is not entitled for any benefit under section 35 or the act. even otherwise, if we go by the scheme of the act, it is clarified in the explanation to section 43(1) that where the assets are acquired for the purpose of scientific research and after some time they are transferred to the business side and the assessee wants to make use of those assets for business, the depreciation on those assets shall be allowed in the light of explanation 1 to sub-section (1) of section 43 of the act, but there is no provision for allowing the benefit of section 35 of the act to the assets which were initially used for the business for production of the articles and things, and in the absence of such a provision, the mere entry in the books of account from one head to other head in our view does not make the assessee eligible for deduction under section 35 of the act, 1961. more so for the purpose of depreciation if the assessee owns the asset it is enough, but for the benefit of allowance under section 35, the assessee should incur expenditure for scientific research.17. in the result, we answer the question in the affirmative, i.e., in favour of the revenue and against the assessee.18. the reference so made stands disposed of accordingly.
Judgment:

1. On an application under Section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question for the opinion of this court:

'Whether, on the facts and in the circumstances of the case and on interpretation of Section 35 of the Income-tax Act, 1961, the learned Tribunal was right in law in not allowing deduction of an amount of Rs. 11,53,294 representing the written down value of assets transferred by the assessee-company from the business use to that of scientific research used in the previous year relevant for the assessment year 1980-81 as expenditure on scientific research ?'

2. The assessee-company derives income from sale and manufacture of rubes, print rolls, etc. The relevant assessment year is 1980-81. The brief facts in the return filed by the assessee are that the assessee claimed an expenditure of Rs. 11,53,294 incurred under the head 'Capital' as expenditure relatable to scientific research. This amount included a sum of Rs. 11,14,885 which represented the written down value of assets, which assets were acquired earlier and used for the purpose of business but transferred to the scientific research department during the financial year relevant to the assessment year in question.

3. The claim of the assessee was that once the assets are transferred from business assets to the assets for scientific research, the assessee is entitled for the benefit of the provision contained in Section 35(1)(iv), as the assessee has incurred expenditure for the assets acquired for scientific research. He further submits that the expenses incurred and the cost of the assets can be seen from Explanation 1 to Section 43(1) of the Income-tax Act, 1961.

4. The Assessing Officer has negatived the claim of the assessee holding that the assessee has not incurred the expenditure for scientific research, in fact the assets were acquired in the earlier years and this year only there is an entry in the books of account to the effect that these assets are now used for scientific research. The Assessing Officer further states that the assessee has explained that on March 31, 1979, an entry was passed debiting the research and development expenses by an amount of Rs. 11,53,294 and crediting the assets accounts by the same amount in scientific research side. This entry has been reversed on June 30, 1980.

5. By debiting the fixed assets account and crediting the research and development account by an amount of Rs. 11,53,294 on that count also the assessee is not entitled for benefit of Section 35(1)(iv) of the Act.

6. In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) has allowed the claim of the assessee but in appeal before the Tribunal, the Tribunal has restored the view taken by the Assessing Officer.

7. Mr. Ranka, learned counsel for the assessee, submits that when the entry was passed on March 31, 1979, debiting the research and development account by an amount of Rs. 11,53,294, there is a transfer and that amounts to expenditure on scientific research and the transfer entry of written down value must be treated as cost of the assets within the meaning of Explanation 1 to Section 43, Sub-section (1) of the Act. Mr. Ranka places reliance on the decision of the Madras High Court in the case of CIT v. Sundaram Fasteners Ltd. : [1997]223ITR455(Mad) . He further places reliance on the decision in the case of CIT v. J.K. Hosiery Factory : [1986]159ITR85(SC) and submitted that in that case, unabsorbed depreciation was there of the unregistered firm which was registered next year. In that case their Lordships have taken the view that the unabsorbed depreciation can be carried forward and the benefit can be given to the registered firm next year. Mr. Ranka further submits that in the case of Saroj Aggarwal v. CIT : [1985]156ITR497(SC) , their Lordships (Supreme Court) have taken the view that while a partner of the firm died and the firm sustained speculation loss, three days thereafter the widow can run the firm under the provision in the partnership deed regarding continuation of the partnership. Their Lordships have held that the widow could be said to have succeeded by inheritance and she can claim the set off of loss of her deceased husband sustained by the firm in speculation business against the speculation profit.

8. Mr. Singhi, learned counsel for the Department, submits that there is no expenditure in view of the provision of Section 35 for the scientific research, therefore, there is no question of allowing the benefit of Section 35 in the facts and circumstances of this case. He further submits that the Assessing Officer has already allowed depreciation to the assessee under Section 32 of the Act. Therefore, there is no question of allowing the assessee the benefit of deduction under Section 35 of the Act. Learned counsel in this connection place reliance on the decision of their Lordships (Supreme Court) in the case of Escorts Ltd. v. Union of India : [1993]199ITR43(SC) .

9. The facts are not in dispute that the assets in question were not purchased by the assessee in the year under consideration. They were purchased in the earlier year and used for business in the year under consideration. The assessee has made only an entry in the books of account on March 31, 1979, debiting the written down value of those assets from the business assets account and crediting the written down value of the assets in the scientific research side. That entry has been reversed on June 30, 1980.

10. Mr. Ranka submits that the Assessing Officer has stated that June 30, 1980, was the last day of the accounting year but the last day of the accounting year was March 31, 1980.

11. Section 35 of the Act provides that if the assessee has incurred any expenditure on scientific research, he/it will be eligible for the deduction as provided under Section 35 on account of the assets acquired for scientific research.

12. The admitted facts of the case are that the assessee has not acquired these assets this year. The machinery was acquired in the earlier year and was used for the purpose of business. This year, only there is an entry in the books of account to transfer these assets from the business side to the scientific research side, whether mere entry is enough to make the assessee eligible for deduction under Section 35 of the Act. In our view that will be contrary to the scheme of the Act of 1961. Section 35 requires expenditure on scientific research.

13. In the case in hand, nothing has been brought on record as to after transfer of these assets from the business side to the research side, what research the assessee has made with the help of machinery. The use of the machinery was the same as that in the earlier year. Earlier the machinery was used for production or manufacturing of goods. If the same use has been made of the machinery in this year, how the assessee can get the benefit of Section 35. It cannot be the intention of the Legislature that mere entry in the books of account from one head to another head will change the character of the assets for the purpose of allowance.

14. Mr. Ranka, learned counsel for the appellant, brought to our notice Explanation 1 to Section 43(1) of the Act of 1961, which provides that where an asset is used in the business after it ceases to be used for scientific research related to that 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 of the Act.

15. It is true, the Legislature has made it clear that if the assets are initially acquired for the scientific research and thereafter if the assessee wants to make use of those assets for the business, he can claim the depreciation on the value of the assets which are reduced by the amount of any deduction allowed under Clause (iv) of Sub-section (1) of Section 35. There is no provision in the Act which provides that if the assessee has acquired some assets for the business and after using those assets for business for some time by mere entry to transfer those assets from the business side to the research side, he can get the benefit of deduction under Section 35.

16. Though Mr. Ranka submits that the accounting year ended on March 31, 1980, the Income-tax Officer has recorded the accounting year in the books as ended on June 30, 1980. Even in the books of account, the accounting year was ended on June 30, 1980, and on that date the entry was reversed and the assets in question were transferred back to the business side. If that is a fact, then on this count the assessee is not entitled for any benefit under Section 35 or the Act. Even otherwise, if we go by the scheme of the Act, it is clarified in the Explanation to Section 43(1) that where the assets are acquired for the purpose of scientific research and after some time they are transferred to the business side and the assessee wants to make use of those assets for business, the depreciation on those assets shall be allowed in the light of Explanation 1 to Sub-section (1) of Section 43 of the Act, but there is no provision for allowing the benefit of Section 35 of the Act to the assets which were initially used for the business for production of the articles and things, and in the absence of such a provision, the mere entry in the books of account from one head to other head in our view does not make the assessee eligible for deduction under Section 35 of the Act, 1961. More so for the purpose of depreciation if the assessee owns the asset it is enough, but for the benefit of allowance under Section 35, the assessee should incur expenditure for scientific research.

17. In the result, we answer the question in the affirmative, i.e., in favour of the Revenue and against the assessee.

18. The reference so made stands disposed of accordingly.