TATA CHEMICALS LTD. VS COMMISSIONER OF INCOME-TAX, 1992 PTD-BOMBAY-HIGH-COURT-INDIA 1529 (1991)

(a) Income-tax---

----Expenditure on scientific research or business expenditure ---Assessee making payment to research laboratory for carrying out research for manufacture of soda ash ---I.T.O. rejecting claim for deduction of amount paid as research laboratory not institution approved under section 35 of Indian Income Tax Act, 1961---Assessee making alternative claim before A.A.C. for deduction of amount paid as business expenditure under section 37 of Indian Income Tax Act, 1961---A.A.C. rejecting claim for deduction under section 37 but remanding matter to I.T.O. for verifying whether research laboratory is an institution approved under section 35---Tribunal, without giving any finding whether expenditure was of the nature specified under section 35, holding that claim cannot be considered under section 37(1)---No clear-cut finding by Tribunal whether expenditure was of the nature specified in Ss.30 to 36-- Conclusion of Tribunal that claim cannot be considered under section 37(1) not valid.

The assessee paid a sum of Rs.1,12,715 to the National Chemical Laboratory (NCL) for carrying out research in manufacture of soda ash and claimed deduction of the amount under section 35(1)(ii) of the Indian Income Tax Act, 1961. The Income Tax Officer rejected the claim for deduction on the ground that NCL was not an institution within the meaning of section 35(1)(ii). On appeal to the Appellate Assistant Commissioner, without prejudice to its claim under section 35(1)(ii), the assessee also contended that such contribution was an allowable deduction under section 37(1) of the Act. The Appellate Assistant Commissioner remanded the matter to the Income-tax Officer for the purpose of verification as to whether NCL was an approved institution for the purpose of section 35. However, the Appellate Assistant Commissioner rejected the alternative claim of the assessee for deduction under section 37 on the ground that the expenditure could not be considered to have been incurred in the course of running the business of manufacturing soda ash. On further appeal, the Tribunal held that the contribution made for scientific research exclusively fell under section 35 and hence it was not deductible under section 37(1). On a reference:

Held, that since the Tribunal had not given any finding as to whether the expenditure was or could be of the nature of section 35(1)(i), the Tribunal could not refuse to consider the assessee's claim for deduction under section 37(1) on the ground that the expenditure was of the nature specified in section 35(1). The claim for deduction could not be considered under section 37 provided there was a clear-cut finding that a particular expenditure was of the nature referred to in sections 30 to 36. In the absence of such a finding, the conclusion of the Tribunal that the claim could not be considered under section 37(1) could not be supported. However, it would be open to the Tribunal while giving effect to the judgment of the High Court to consider whether the expenditure was really of the nature falling under section 35.

(b) Income-tax---

----Business expenditure---Gratuity---Tribunal rejecting claim for deduction of gratuity in view of section 40-A(7) of the Indian Income Tax Act, 1961 following Shree Sajjan Mills Ltd. v. C.I.T. (1985) 156 I T R 585---Justified.

Held also, that the Tribunal was right in rejecting the assessee's claim for deduction of the sum of Rs.4,52,000 in respect of gratuity liability in view of the provisions of section 40-A(7) of the Act following decision of the Supreme Court in Shri Sajjan Mills Ltd. v. C.I.T (1985) 156 I T R 585.

C.I.T. v. Ghatkopar Estate and Finance Corporation (P.) Ltd (1989) 177 I T R 222 (Bom.) ref.

Dinesh Vyas with P.C. Tripathi instructed by Messrs Mulla and Mulla and C.B.C. for the Assessee.

G.S. Jetley, Senior Advocate with P.S. Jetley and K.C. Sidhwa for the Commissioner.

JUDGMENT

T.D. SUGLA, J.---In this reference at the instance of the assessee relating to its assessment for the assessment year 1973-74, the Income Tax Appellate Tribunal has referred to this Court the following questions of law for opinion under section 256(1) of the Income Tax Act, 1961:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of Rs.1,12,715 to the National Chemical Laboratory, Poona, for carrying out research for manufacture of anhydrous aluminium chloride from bauxite was not deductible under section 37(1) of the Income Tax Act on the ground of being expenditure of the nature described under section 35?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the assessee's claim for deduction of the sum of Rs.4,52,000 in respect of gratuity liability in view of .the provisions of section 40-A(7) of the Income Tax Act, 1961?"

As regards the first question of law, we would like to observe even at the outset that the question, it appears to us, does not bring out the real controversy between the parties. In this context, it may be mentioned that the assessee had, inter alia, paid a sum of Rs.1,12,715 to the National Chemical Laboratory, Poona, for carrying out research in manufacture of anhydrous aluminium chloride from bauxite and had claimed deduction before the Income Tax Officer under section 35(1)(ii) of the Act. The Income Tax Officer had rejected the claim on the ground that the. National Chemical Laboratory, Poona, was not an institution within the meaning of section 35(1)(ii). In appeal before the Appellate Assistant Commissioner also, the assessee's claim for deduction was primarily under section 35(l)(ii). Without prejudice to that claim, the assessee also contended that such a contribution was allowable as a deduction under section 37 of the Income Tax Act, 1961. The Appellate Assistant Commissioner remanded the matter to the Income Tax Officer for the purpose of verification whether the National Chemical Laboratory, Poona, was an approved institution for the purpose of section 35. However, he rejected the assessee's alternate claim on the ground that the expenditure could not be considered to have been incurred in the course of running a business, which is that of manufacturing soda ash. Before the Tribunal also, the assessee's claim in the first instance was for deduction under section 35(1)(ii). But, as recorded by the Tribunal in paragraph 3 of its order, it was also claimed before it that there was a factual error, and that the payment of Rs.1,12,715 to the National Chemical Laboratory, Poona, was made in respect of a research programme undertaken by them at the assessee's instance for manufacture of anhydrous aluminium chloride. Another alternative claim was, of course, that the deduction was allowable under section 37. In paragraph 4 of its order, the Tribunal has given a finding that the contribution for scientific research exclusively falls within the domain of section 35 and hence it could not be considered for deduction under section 37(1).

Perhaps, it is for this reason that though the question of law suggested by the assessee was as under:--

"Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the payment of Rs.1,12,715 to the National Chemical Laboratory, Poona, for carrying out research for manufacture of anhydrous aluminium chloride from bauxite is expenditure of the nature described in section 35 and hence cannot be considered for deduction under section 37(1) of the Income Tax Act? or

Whether the claim of the applicant to deduct the sum of Rs.1,12,715 under section 37(1) of the Income Tax Act has been rightly rejected on the ground that the said expenditure was of the nature described in section 35 and even if the said expenditure was incurred wholly and exclusively for the purpose of business of the applicant?"

The Tribunal refrained the question of law and referred to us question No.1 as reproduced in paragraph 1. Since there was also a controversy before the Tribunal as to whether the expenditure herein was of the nature mentioned in section 35(1)(i) on which the Tribunal did not give any finding. We are of the view that the proper question of law is the question that was suggested by the assessee. Accordingly, we reframe the question of law referred to us by the Tribunal in the form as was suggested by the assessee.

That being so and having found that the Tribunal has not given any finding as to whether the expenditure herein was or could be of the nature specified in section 35(1)(i), it has to be held that the Tribunal could not refuse to consider the assessee's claim for deduction under section 37(1) on the ground that the expenditure was of the nature specified in section 35. Needless to mention that the finding of the Tribunal pertains to the nature of the expenditure as claimed by the assessee under section 35(1)(ii) only and not to the claim under section 35(1)(i). Shri Jetley, learned counsel for the Revenue, has placed reliance on our Court's judgment in the case of CIT v. Ghatkopar Estate and Finance Corporation (P.) Ltd. (1989) 177 I T R 222, for the purpose of showing that if any expenditure falls under any of the clauses of sections 30 to 36, it could not be considered under the residuary section 37. There can possibly be no quarrel with that proposition. Section 37 itself clearly lays down so. It can be justifiably held that the claim for deduction cannot be considered under section 37, provided there is a clear-cut finding that a particular expenditure is of the nature referred to in any of the earlier sections. In the absence of such a finding, the conclusion that the claim cannot be considered under section 37(1) cannot certainly be supported. Accordingly, we answer the refrained first question in the negative and in favour of the assessee. However, it will be open to the Tribunal while giving effect to the judgment of this Court to consider whether the expenditure herein is really of the nature falling under the clauses or subsections of section 35. It would be on the basis of that finding only it could be held that that claim cannot be considered under section 37. Needless to mention if the assessee satisfies all the conditions provided in section 35(1)(i), the claim might have to be allowed under that clause of the section itself.

As regards the second question of law, counsel are agreed that in view of the Supreme Court decision in the case of Shree Sajjan Mills Ltd. v. C.I.T. (1985) 156 I T R 585, the question is to be answered in the affirmative and in favour of the Revenue. The question is so answered.

There will be no order as to costs.

M.B.A./1648/TQuestions answered.