Ajit K.Sengupta, J. - (1.) In this reference under Section 256(2) of the Income-tax Act, 1961, at the instance of the assessee, the following questions have been referred by the Tribunal for the opinion of this court for the assessment year 1976-77 : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in not following the decision of the Supreme Court pointed before them to hold that the electronic business of the company was an indivisible business and not liable to be bifurcated and that all the expenditure under the Alpha Electro Division was allowable deductions ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the electronic business of the company is divisible into two divisions and that only expenditure in respect of one division is allowable"
(2.) In its revised return of total income filed for the assessment year 1976-77, the assessee-company claimed deduction for an expenditure of Rs. 15,06,805 claimed to have been incurred in relation to Alfa Electro Unit. The expenditure in question mainly related to the research work and it was claimed that this should be allowed as a business expenditure, since Alfa Electro Unit was started for production of electronic goods. The assessee-company had shown these expenses as "pre-operative expenses" in its final accounts. In the balance-sheet, the directors had reported that since February, 1976, the activities of the instruments division had been suspended. The relevant portion of the directors' report dated September 3, 1976, with reference to the accounts of the assessee-company for the financial year ending March 31, 1976, was as under : "As regards Alpha Electro Unit of the company, the activity in the instruments division has been presently suspended since February, 1976, owing to general recession and unfavourable conditions in the market. With this suspension, certain machinery, equipment and instruments not in use have been disposed of at the best available price so as to save expenses on cleaning and maintaining for the same. The activity in the mini-computer division has also been closed down. However, consolidation of documentation and other designs have been completed. R and D recognition has been renewed for an additional period of three years, valid up to March 31, 1979. Company is following up with the Government of India for issue of letter of intent/industrial licence for the same. Negotiations with the Punjab State Industrial Development Corporation and the U. P. Electronics Corporation Limited, for promotion of this industry in joint venture are in advanced stages and it is expected to have some protocol agreement shortly."
(3.) At page 25 of the printed balance-sheet, the auditors of the assessee-company reported that the expenditure of Rs. 15,06,803 had not been debited to the profit and loss account for the financial year ending March 31, 1986, as production had not commenced. The relevant portion of the auditors' note is extracted hereinbelow : Auditors' note No. 8 in Schedule O : "(a) Sale of prototype production has been credited to pre-operative expenditure and hence, the pre-operative expenditure pending adjustment is reduced to this extent. (b) Pre-operative expenditure pending adjustment includes expenses of R and D nature which are subject to certification by the prescribed authority (i.e., Secretary, Department of Science and Technology, Government of India) and such expenditure has not been debited to the profit and loss account for the year as the production has not commenced and hence to be adjusted in the year of commercial production as per the provisions of the Income-tax Act, 1961. For the balance the company intends to capitalise in the year of commercial production. (c) Stock of prototype in hand (cost unascertainable) shall be accounted for as and when sold.";