- (1.) The seeds of the present controversy were sown as early as in 1946. It is unfortunate that this matter should be coming up before this Court for its consideration nearly five decades later, though it must be pointed out that the issue in its present form is the outcome of an amendment made by the Finance (No. 2) Act, 1980 (hereinafter referred to as 'the 1980 Act') to the Income-tax Act, 1961 (hereinafter referred to as 'the 1961 Act'). It is also a curious co-incidence that the 1980 Act effected two amendments in the 1961 Act with retrospective effect and the validity of both these provisions have been challenged before the Courts. The first was the controversy with regard to the retrospective amendment of S. 80-J which was settled by this Court by its decision in Lohia Machines Limited v. Union of India, (1985) 152 ITR 308 : (AIR 1985 SC 421). It is the second amendment to the provisions contained in S. 35(2) of the 1961 Act that has given rise to the present controversy between the parties.
(2.) The question is really one of interpretation of two important provisions relating to the computation of business income for purposes of income-tax. We may start with the provisions of the Indian Income-tax Act, 1922 (hereinafter referred to as the '1922 Act'). The computation of business income for purposes of income-tax was done in accordance with the provisions of S. 10 of the said Act. In the process of making such computation, the Act provided for two important deductions (among others), in respect of the capital assets employed in the business. The first was the deduction under clause (vi) of S. 10(2) of an allowance in respect of the depreciation of building, machinery, plant or furniture being the property of the assessee and used for the purposes of the business, at a prescribed percentage of the written down value of such assets. This allowance is calculated, in respect of the year of acquisition of the property, at a percentage of its actual cost to the assessee and in subsequent years at a graduated scale on the basis of the actual cost less the depreciation allowances granted in the preceding years. In strict principle, this is an allowance of capital nature but it is now well settled that the allowance of depreciation has to be taken into account in order to ascertain the true profits of a business and, therefore, an assessee is permitted to deduct, in the computation of the business income year after year, the prescribed percentage of the value of the assets used for the purposes of business. The second allowance was not there in the 1922 Act originally and was introduced by the Income-tax (Amendment) Act, 1946. The introduction was of certain allowances in respect of expenditure on "scientific research related to the business" an expression which was defined in a fairly comprehensive manner by the statute. Three types of allowances were permitted in respect of this category of expenditure of which we are here concerned with only one. This provision was contained in clause (xiv) of S. 10(2) which permitted a deduction- "in respect of any expenditure of a capital nature on scientific research related to the business, an allowance for each of the five consecutive previous years beginning with the year in which the expenditure was incurred, or where the expenditure was incurred prior to the commencement of the business, for each of the five consecutive previous years beginning with the year in which the business was commenced, equal to one-fifth of such expenditure: Provided that no allowance shall be made for any expenditure incurred more than three years before the commencement of the business : Provided further that xxx xxx xxx (d) where a deduction is allowed for any previous year under this clause in respect of expenditure represented wholly or partly by any asset, no deduction shall be allowed under clause (vi) or clause (vii) for the same previous year in respect of that asset; (e) where an asset is used in the business after it ceases to be used for scientific research related to that business, and a claim for an allowance under clause (vi) or clause (vii) is made in respect of that asset, the actual cost to the assessee of the asset shall be treated as reduced by the amount of any deductions allowed under this clause;" A cursory and conjoint reading of S. 10(2)(vi) and S. 10(2)(xiv) suggests that where an assessee incurs expenditure of a capital nature on scientific research related to the business and the expenditure results in the acquisition of an asset, the assessee can claim, under clause (vi), a deduction of the specified percentage of the written down value of the asset and under clause (xiv) he can ask for a deduction, in five consecutive years, of the expenditure he has incurred on the acquisition of the asset. For this purpose, we are assuming that an asset used for scientific research related to the business is also ipso facto an asset used for the purpose of business. There has been some debate before us as to whether this is always so but we need not enter into that controversy for the purposes of the present case.
(3.) It will at once be seen that, 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 5 years and the other a percentage of the expenditure over a number of consecutive years at a graded scale as already mentioned. The question at once leaps to the mind as to whether it could have been the intention of the legislature to permit both these deductions simultaneously to an assessee. The provisions of clauses (d) and (e) of the proviso to S. 10(2)(xiv) contain a clue to answer this question. More about it later.;