Commissioner Of Income-Tax v. Sarabhai Sons Pvt. Ltd.

1. This reference is made at the instance of the Revenue by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961. The questions referred to this court are as under :

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal rightly came to the conclusion that the provident fund contribution as made by the assessee-company in respect of the remuneration payable to its director, Gautam Sarabhai, was an allowable deduction in computing the business income of the assessee-company ?

(2) Whether the Income-tax Appellate Tribunal rightly came to the conclusion that since Gautam Sarabhai, a director, was an employee of the assessee-company, contribution of the company to the provident fund account of Gautam Sarabhai was an allowable deduction in computing the business income of the assessee ?

(3) Whether, on the facts and in the circumstances of the case, the finding of the Appellate Tribunal that the assessee was entitled to include for purpose of computation of capital employed for the purpose of section 80J read with rule 19A of the Income-tax Rules, 1962, the value of the asset acquired for scientific research in respect of which full deduction was allowed under section 35(2)(ia) of the Act and in respect of which no depreciation is allowable under section 35(2)(iv) is correct in law ?

(4) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the capital expenditure of Rs. 1,77,763 in respect of scientific research was liable to be included in computing the capital employed under section 80J of the Act read with rule 19A(2)(i) of the Income-tax Rules, 1962 ?

(5) Whether the Tribunal was right in law in holding that no sooner the capital was utilised for the purpose of acquiring any asset for a business, the value of such asset was liable to be included for computing the capital for the purpose of relief under section 80J read with rule 19A and the fact that the said asset may have been used for the purpose of the assessee's business and the expenditure relating to business was fully allowed as deduction against the business profits will be of no consequence ?"

2. At the outset, it may be stated that the point which arises for consideration as a result of questions Nos. 1 and 2 is now covered by the decision of this court in CIT v. Karamchand Premchand P. Ltd. [1993] 200 ITR 281. Therein, it is held that contributions to superannuation and provident funds in respect of directors of a company who are treated as employees are deductible. In this case, there is no dispute that the director concerned was an employee of the assessee-company. In that view of the matter, questions Nos. 1 and 2 will have to be answered in the affirmative, that is, against the Revenue and in favour of the assessee.

3. The assessee-company, during the accounting period corresponding to the assessment year 1969-70, had incurred an expenditure of Rs. 1,77,753 on scientific research. The assessee had claimed deduction of that amount under section 35(1)(iv) read with section 35(2)(ia) of the Act, as they then stood, and the same was granted. The assessee also claimed deduction on Rs. 1,77,753 under section 80J on the ground that it was capital employed in the newly established industrial undertaking. The Income-tax Office excluded this amount while computing the capital employed on the ground that 100 per cent. deduction was granted in respect thereof under section 35 and, therefore, the value of the asset had become nil. In the appeal filed before the Appellate Assistant Commissioner, the assessee succeeded on this point and the Income-tax Officer was directed to include this amount in the computation of capital employed by the assessee. The view taken by the Appellate Assistant Commissioner was confirmed by the Tribunal in further appeal by the Revenue.

4. What is contended by learned counsel appearing for the Revenue is that allowing deduction under both sections 35 and 80J would amount to double deduction in regard to the same business outgoing and that is ordinarily not permissible as no Legislature could have ever intended double deduction in regard to the same business outgoing. In support of his contention, learned counsel has relied upon the decision of the Supreme Court in Escorts Ltd. v. Union of India [1993] 199 ITR 43. In that case, the assessee had incurred certain expenditure and had acquired capital asset to be used for scientific research relating to the business of the assessee. The assessee claimed deduction by way of depreciation under section 32 and also deduction under section 35(1)(iv). The Supreme Court held that there is a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing, and, if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions - both under section 10(2)(vi) and section 10(2)(xiv) of the 1922 Act, or both under section 32(1)(ii) and section 35(1)(iv) of the 1961 Act. The Supreme Court, referring to the use of the phrase "in respect of the same previous year" in section 35(2)(iv), held that those words indicate that there is a basic scheme, unspoken but clearly underlying the Acts, that the two allowances cannot be and are not intended to be granted in respect of the same asset or expenditure. It has further held that (headnote) :

"Where a capital asset used for scientific research related to the business of the assessee is also ipso facto an asset used for the purpose of the business, it is impossible to conceive of the Legislature having envisaged a double deduction in respect of the same expenditure, one by way of depreciation under section 32 of the Income-tax Act, 1961, and the other by way of allowance under section 35(1)(iv) of a part of the capital expenditure on scientific research, even though the two heads of deduction do not completely overlap and there is some difference in the rationale of the two deductions."

5. The reason given by the Supreme Court for taking this view is that the deductions of the allowance on scientific research assets and of depreciation are basically of the same nature intended to enable the assessee to write off certain items of capital expenditure against his business profits. Interpreting the relevant provisions, the Supreme Court held that the Act did not permit a deduction for depreciation in respect of the cost of a capital asset acquired for purposes of scientific research to the extend that such cost had been written off under section 35(1) and (2). It is further observed that it is not envisaged, and indeed, it would be meaningless to say that depreciation could be allowed on them thereafter with a further absurdity that it could be allowed starting with the original cost of the asset despite its user for scientific research and the allowances made under the

"scientific research clause"

6. What is required to be noted is that the Supreme Court was not called upon to examine whether deduction if claimed in respect of expenditure incurred for acquiring a capital asset for scientific research relating to the assessee's business could also be claimed as a deduction under section 80J on the ground that such capital expenditure amounted to capital employed. The principle indicated by the Supreme Court would apply if it is found that the deductions which are claimed are basically of the same nature. If the deductions claimed are basically of the same nature, an assessee cannot be granted double deduction even though the two heads of deductions may be different and there is some difference in the rationale of the two deductions. But this principle will not apply if the deductions claimed are basically of different nature or there is a clear statutory indication to the contrary. With this as the correct legal position, we will have to examine whether, in this case, the assessee was entitled to both the deductions, one under section 35 and the other under section 80J.

7. Section 80J falls in Chapter VI-A of the Act. Section 80A, as it then stood, provided that, in computing the total income of the assessee, there shall be allowed from his gross total income, in accordance with an subject to the provisions of the Chapter, the deductions specified in sections 80c to 80u. clause (5) of section 80b defined "gross total income" as the total income computed in accordance with the provisions of the Act before making any deduction under the Chapter or under section 280-O. Section 2(45) defines "total income" to mean the total amount of income referred to in section 5, computed in the manner laid down in the Act. One of the heads which is chargeable to income-tax is "profits and gains of business or profession". Section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Thus, while computing the income from profits and gains of business or profession the expenditure incurred for scientific research becomes permissible deduction. Deduction by way of depreciation is permitted as a capital assets depreciates in value as a result of its use. Such deduction is permitted while computing the total income of the assessee. Section 80J was enacted for the purposes of giving an incentive to the entrepreneur to establish new industrial undertakings and for certain other purposes. It provided for deduction, no doubt, while computing the total income of the assessee, but on a difference basis. The deduction was provided to encourage establishment of new industrial undertakings and for that reason, the deduction was related to the capital employed in the new industrial undertakings. Whereas expenditure on scientific research is made deductible under section 35 on the ground that it is expenditure incurred for the purpose of scientific research related to the business of the assessee, the deduction contemplated by section 80J is not because of the fact that the assessee has incurred expenditure on scientific research related to his business but because he has employed capital in establishing a new industrial undertaking, though the capital employed by the assessee may also be for the purpose of acquiring an asset for scientific research. Thus, not only are the heads under which the deductions are provided different but the nature of these deductions is also different as the objects for which the deductions are granted are also different. This is also borne out by provisions of the Act.

8. Section 80J appeared in chapter VI-A and that Chapter was added in the Act subsequently. While introducing that Chapter in the Act, the Legislature thought it fit to define gross total income to mean total income computed in accordance with the provisions of the Act, but before making any deduction under that Chapter. Thus, for the purpose of that Chapter, the income as computed in terms of sections 28 to 43A was to be regarded as the gross total income. Having provided like this, the Legislature then provided for a deduction under section 80J. This is a clear indication in the Act itself to show that the deduction contemplated by section 80J was to be granted in addition to other deductions that were available under other provisions of the Act.

9. We are, therefore, of the opinion that the deduction on Rs. 1,77,753 claimed by the assessee under section 80J was permissible deduction.

10. In taking this view, we are supported by the decision of the Andhra Pradesh High Court in CIT v. Warner Hindustan Limited [1986] 160 ITR 217, wherein it is held that the fact that deduction is given for the purpose of computing taxable income under section 35 for expenditure on scientific research does not mean that it ceases to be capital employed or an asset and, thereof, in computing the total value of assets under rule 19A(2), capital expenditure on scientific research which has already been allowed should be included. Though learned counsel for the Revenue is right in submitting that the Andhra Pradesh High Court has not given reasons for taking this view, we see no reason to differ from that view because the Income-tax Act is an all-India statute and as pointed out by the Bombay High Court in Maneklal Chunilal and Sons Ltd. v. CIT [1953] 24 ITR 375 and this court in CIT v. Sarabhai Sons Ltd. [1983] 143 ITR 473, it is desirable to follow uniformity in income-tax matters.

11. For the reasons stated above, questions Nos. 1 and 2 are answered in the affirmative, that is, against the Revenue and in favour of the assessee. Questions Nos. 3, 4 and 5 are also answered in the affirmative, that is, against the Revenue and in favour of the assessee. Reference is disposed of accordingly with no order as to costs.