- (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. 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. 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. 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. 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.
(3.) 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] 223 ITR 455. He further places reliance on the decision in the case of CIT v. J.K. Hosiery Factory [1986] 159 ITR 85 (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] 156 ITR 497, 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. 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] 199 ITR 43. 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. ;