Commissioner of Income Tax vs Gujarat Aluminium Extrusions Pvt. Ltd.

A.R. Dave, J.—At the instance of the Revenue, the following question has been referred to this court under the provisions of Section 256(1)

of the Income Tax Act, 1961 (hereinafter referred to as ""the Act"") :

Whether, on the facts and in the circumstances of the case and in law, the Tribunal is right in holding that deduction u/s 35(2) is allowable on

capital expenditure for building which is under construction and is not put to use for research and development purpose ?

We have heard the senior advocate, Shri D.D. Vyas, standing counsel for the applicant-Revenue, and the learned advocate, Shri Tushar

Hemani, for the respondent-assessee.

The facts giving rise to this reference, in a nutshell, are as under :

The assessee is a private limited company manufacturing aluminium extruded sections. The assessee constructed a building for the purpose of

scientific research and, therefore, claimed deduction under the provisions of Section 35(1)(iv) read with Section 35(2) of the Act for the

assessment years 1981-82 and 1982-83. It is not in dispute that construction of the building was completed on October 25, 1981, as per the

certificate given by the concerned architect.

The assessee claimed the deduction under the provisions of Section 35 of the Act but as construction of the building was not over and as the

building was not put to use in the said assessment years, the Income Tax Officer did not allow the deduction claimed by the assessee.

Being aggrieved by the disallowance, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of

Income Tax allowed the appeal holding that it was not necessary for the assessee to put the said building to use so as to avail of the deduction

under the provisions of Section 35 of the Act.

Being aggrieved by the order passed by the Commissioner of Income Tax (Appeals), the Revenue filed an appeal before the Tribunal. The

Tribunal agreed with the view expressed by the Commissioner of Income Tax (Appeals) and dismissed the appeal.

In the circumstances referred to hereinabove, the question which this court has to decide is whether the assessee can avail of deduction under

the provisions of Section 35 of the Act even if the assessee does not use the building for scientific research.

Standing counsel appearing for the Revenue has submitted that as the building was not put to use for research and development by the assessee

during the assessment years in question, the assessee was not entitled to the deduction under the provisions of Section 35 of the Act. According to

him, the Assessing Officer was absolutely right when he disallowed the claim made by the assessee. As per his submission, the Commissioner of

Income Tax (Appeals) as well as the Tribunal erred in law by allowing the deduction claimed by the assessee under the provisions of Section 35 of

the Act.

The relevant portion of Section 35, which was in force at the relevant time, is as under

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 deduction as may

be admissible under the provisions of Sub-section (2).

(2) For the purposes of Clause (iv) of Sub-section (1),--. . .

(ia) in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any

previous year shall be deducted for that previous year :

Explanation.-- Where any capital expenditure has been incurred before the commencement of the business, the aggregate of the expenditure so

incurred within the three years immediately preceding the commencement of the business shall be deemed to have been incurred in the previous

year in which the business is commenced.

Standing counsel for the Revenue has submitted that though the assessee had incurred capital expenditure, the assessee could have claimed the

deduction only if the assessee had used the building for the purpose of scientific research.

It has been submitted by him that the purpose behind allowing the deduction is to encourage research and development activity. According to

him, the Revenue has enacted Section 35 so as to give an incentive to assessees so that they initiate research and development activities which are

ultimately beneficial to the society. According to him, if the building which has been constructed by the assessee is in fact not used for the purpose

of research and development, the purpose with which the said section is enacted would be frustrated. He has submitted that so as to avail the

deduction under the provisions of Section 35 of the Act, the assessee must establish the following two facts :

(i) the asset must be acquired during the relevant previous year ; and

(ii) the asset must be used for research and development purpose.

He has fairly submitted that Section 35 of the Act nowhere makes it obligatory on the part of the assessee to use the asset for the purpose of

scientific research to avail of the deduction. However, he has submitted that looking to the object with which the section has been enacted, one has

to interpret the section in such a way that if the asset is not put to use for research and development, the assessee does not get the benefit of

deduction under the provisions of Section 35 of the Act.

It has been further submitted by learned standing counsel that both the appellate authorities erred while not considering the aforestated relevant

facts. It has been also submitted by him that the Tribunal materially erred in law in allowing the deduction even though the construction of the

building was not over in one of the assessment years. According to him, if the construction of the building was not over, the building could not have

been used for research and development. The said important factor was lost sight of by the Tribunal and, therefore, according to him, the orders

passed by both the appellate authorities are not just and proper. In these circumstances, it has been submitted by standing counsel for the Revenue

that the question referred to this court deserves to be answered in favour of the Revenue.

On the other hand, the learned advocate, Shri Tushar Hemani, appearing for the assessee, has submitted that both the appellate authorities

were justified in setting aside the order passed by the Income Tax Officer as the assessee was entitled to the deduction as per the provisions of

Section 35 of the Act.

So as to substantiate his submission, the learned advocate for the assessee has submitted that looking to the language employed in Section 35

of the Act, to avail of the deduction, the assessee has to incur expenditure. If the expenditure is of a capital nature, the assessee becomes entitled

to claim the deduction under the provisions of Section 35(1)(iv) read with Section 35(2)(ia) of the Act.

It has been submitted by him that upon perusal of the relevant provisions, it is crystal clear that the Legislature does not expect the assessee to

use the asset for research and development purpose during the relevant previous year. According to him, if any expenditure is incurred during the

previous year, the assessee becomes entitled to the deduction even if the asset in question is not actually used. He has relied upon the judgments

delivered in the cases of :

(1) Commissioner of Income Tax Vs. H.M.T. Ltd.,

(2) Ravi Machine Tools (P.) Ltd. Vs. Commissioner of Income Tax, and

(3) Commissioner of Income Tax Vs. H.M.T. Ltd. (No. 1), .

He has mainly relied upon the judgment delivered in the case of Commissioner of Income Tax Vs. H.M.T. Ltd. (No. 1), . It has been

submitted by him that in the said case a similar issue had arisen and the Karnataka High Court held that the amount spent by the assessee towards

the value of work-in-progress, machinery and equipment in transit and under erection at the assessee''s research and development division would

be eligible for deduction u/s 35 of the Act. He has submitted that the Karnataka High Court, while delivering the said judgment, had relied upon the

ratio of the judgment delivered by the same High Court in the case of Ravi Machine Tools (P.) Ltd. Vs. Commissioner of Income Tax, . It has

been fairly submitted by him that the said judgment pertains to an interpretation of the provisions of Section 80J of the Act. However, his

endeavour is to show that when the words ""actual use"" are not used in the section, the Revenue cannot read those words in the section so as to

deprive the assessee of the advantage which the Legislature wants to give to the assessee. According to him, benefit u/s 80J was directed to be

given to the concerned assessee in the judgment delivered in the case of Ravi Machine Tools (P.) Ltd. Vs. Commissioner of Income Tax, , though

the capital which was employed by the assessee had not been actually used during the relevant previous year. Using the said analogy in the instant

case, it has been submitted by the learned advocate that as the provisions of Section 35 of the Act do not make it obligatory on the part of the

assessee to use the asset for research and development, the Revenue cannot expect the assessee to use the said asset during the relevant previous

year for research and development purpose so as to avail of the deduction under the said section.

We have heard the learned advocates at length and have considered the judgments cited before this, court.

The object behind the enactment of Section 35 of the Act is to encourage research and development activities by the assessee. As an

incentive, the Legislature has given this benefit by way of deduction in respect of the capital expenditure incurred by the assessee. This is a

provision for the benefit of the assessee and if the assessee incurs capital expenditure for the purpose of research and development during the

relevant previous year, in our opinion, the Revenue should not deprive the assessee of the benefit of deduction under the provisions of Section 35

of the Act even if the asset is not put to use for research and development. It is a settled legal position that the provision for exemption or relief

should be construed liberally and in favour of the assessee. If the section is interpreted in the manner suggested by standing counsel for the

Revenue, in our opinion, we would be depriving the assessee of the benefit which the Legislature desires to give to the assessee.

It is also pertinent to refer to Circular No. 5-P (LXXVI-63) of 1967 dated October 9, 1967, issued by the Department. The relevant extract

of the said circular reads as under :

`""(ii) The amount of capital expenditure incurred by an assessee after March 31, 1967, on scientific research related to his business will be allowed

to be deducted in full in computing his business profits of the year in which such expenditure is incurred.

From the provisions of the above referred to circular also, the intention of the Revenue is patent. The intention is to give benefit to the assessee

who incurs expenditure on scientific research related to his business. Even the circular issued by the Department does not make use of the capital

asset a condition precedent for claiming deduction under the provisions of Section 35 of the Act.

In our opinion, both the appellate authorities have rightly considered the spirit with which Section 35 of the Act has been enacted by the

Legislature and the circular referred to hereinabove while allowing deduction to the assessee under the provisions of Section 35 of the Act.

We are of the view that when the Legislature has not expected the assessee to put the asset to actual use, it would not be open to the Revenue

to deprive the assessee of the benefit of deduction under the provisions of Section 35 of the Act if the asset is not used in the previous year in

which the capital expenditure is incurred.

It is also relevant to note that the deduction is given not on the count of user. Had it been so, the assessee would have been given benefit in the

nature of depreciation. It cannot be disputed that depreciation is allowed when the asset is used by the assessee and when he suffers loss on

account of wear and tear of the asset. Had the intention of the Legislature been to grant additional depreciation, we would have agreed with the

submissions made by standing counsel appearing for the Revenue but the position is different in the instant case. Here, the Legislature wants the

assessee to spend more amount for scientific research and it also wants the assessee to get the benefit immediately in the year in which he incurs

the expenditure in the nature of revenue or capital for scientific research and therefore the Legislature refers to incurring of the expenditure and not

the using of the asset.

Once it is established that the expenditure was incurred for the purpose of scientific research and the conditions incorporated in Section 35 of

the Act are fulfilled, in our opinion, the Revenue cannot expect the assessee to start using the asset immediately. In a given case the assessee might

have to go on incurring expenditure for several years before putting the asset to actual use. If the interpretation advanced by standing counsel for

the Revenue is accepted, we are afraid, the assessee would not be in a position to avail of the deduction u/s 35 of the Act to the extent to which

the Legislature intends to give to the assessee.

It is also pertinent to note that the deduction under the provisions of Section 35 of the Act is given only during the previous year in which the

expenditure is incurred. If the assessee has taken several years to construct or acquire a particular asset, the assessee would be deprived of the

benefit of Section 35 of the Act because he can put the asset to use only when construction of the asset is completed and it would not be open to

him to claim deduction in respect of the expenditure incurred during the earlier previous years because looking to the provisions of Section 35 of

the Act, the assessee can avail of the benefit of deduction of the amount of expenditure incurred only during the previous year and not for the

earlier period unless his case is covered under the provisions of an exception to Section 35(2)(ia) of the Act.

For the reasons stated hereinabove, in our opinion, the Tribunal was right when it confirmed the order passed by the Commissioner of Income

Tax (Appeals) who had deleted the disallowance.

For the afroestated reasons, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.

The reference stands disposed of with no order as to costs.