In order to get the benefit of deduction in respect of capital expenditure on scientific research, it is sufficient that the capital expenditure is incurred in the previous , year as provided under the provisions of section 35. Explanation 2 to section 35 is declaratory in nature.

The assessee was a private limited company engaged in the business of manufacture and sale of pesticides. During the previous year relevant to the assessment year 1980-81, the assessee commissioned an additional unit at Ankleshwar in Gujarat. For the purpose of starting this unit, the assessee entered into an agreement with the Gujarat Industrial Development Corporation for acquiring two sheds alongwith land. The claim put forward by the assessee under section 35 of the Income Tax Act, 1961, pertaining to capital expenditure on scientific research was declined to the extent of Rs.11,264 representing the value of the land for the reason that registration of document of sale was not executed during the relevant accounting period. The Tribunal, however, directed the Income-tax Officer to allow the entire amount claimed by the assessee as capital expenditure incurred for scientific research. On a reference:

Held, that Explanation 2 to section 35 is declaratory in nature and, therefore, it would be made applicable to the relevant assessment year also. even though, the Explanation had come into the statute only with effect from April 1, 1984. The assessee was entitled the deduction under section 35.

(b) Income-tax---

----Depreciation---Investment allowance---Actual cost---Central subsidy is not deductible in computing actual cost----Indian Income Tax Act, 1961, Ss.32, 32A & 43.

The Central subsidy is not deductible in calculating actual cost for purposes of computing depreciation and investment allowance.

CIT v. P.J. Chemicals Ltd. (1994) 210 1TR 830 (SC) fol.

P.K.R. Menon and N.R.K. Nair for the commissioner.

P. Balachandran for the Assessee.

JUDGMENT

MRS. K. K. USHA, J.---Income-tax Reference No. 16 of 1993:

Reference at the instance of the Revenue is against the order of the Income-tax Appellate Tribunal, Cochin Bench, in I.T.A. No.529/Coch of 1987. The relevant assessment year is 1981-82. The following question is referred for the opinion of this Court;

"Whether, on the facts and in the circumstances of the case, should not the central subsidy received be reduced from the cost of the asset for the purposes of depreciation and investment allowance?"

It is admitted by both sides that the above issue is settled by a decision of the Supreme Court in CIT v. P.J. Chemicals Ltd. (1994) 210 ITR 830, in favour of the assessee.

In the light of the above, we answer the question in the negative, against the Revenue and in favour of the assessee.

Income-tax Reference No. 15 of 1993:

This reference, at the instance of the Revenue, arises from the order of the Income-tax Appellate Tribunal, Cochin Bench, in I.T.A. No.525/Coch. of 1987. The relevant assessment year is 1980-81. The following question is referred for the opinion of this Court:

"Whether, on the facts and in circumstances of the case, the cost of land and building could be allowed as deduction during the previous year relevant to the assessment year 1980-81 since the ownership of the land and buildings vested in the assessee only on September 30, 1983?"

The relevant facts are as follows: The assessee, a private limited company, is engaged in the business of manufacture and sale of pesticides. During the previous year relevant to the assessment year ended on June 30, the assessee commissioned an additional unit at Ankleshwar in Gujarat. For the purpose of starting this unit, the assessee entered into an agreement with the Gujarat Industrial Development Corporation for acquiring two sheds alongwith the land. Shed No.412 was designated to be used for scientific research. Total cost of the land and the above shed came to Rs.1,08,728. In addition to the above, it acquired shed No.422 also for use as factory building.

The assessing authority held that no depreciation would be allowable with reference to the factory building inasmuch as final registration of the sale-deed for the purchase of the shed was not made during the previous year relevant to the assessment year 1980-81. The claim put forward by the assessee under section 35 pertaining to capital expenditure on scientific research was also declined to the extent of Rs.11,264 representing the value of the land for the reason that registration of document of sale was not executed during the relevant accounting period. Depreciation on factory building was initially allowed by the Assessing Officer. The Commissioner of Income-tax (Appeals) took the view that only the actual payment of Rs.17,353 with respect to expenditure on land and buildings would be allowable and not the sum of Rs.86,764 as. claimed by the assessee under sections 35 and 32 of the Income-tax Act. With respect to the claim for depreciation, the first appellate authority directed to disallow depreciation with respect of the factory shed inasmuch as the ownership in the shed was not vested with the assessee during the previous year relevant to the assessment year 1980-81.

Aggrieved by the above, the assessee went in second appeal before the Tribunal. With reference to shed No.412 used for scientific research, the Tribunal accepted the contention raised by the assessee. It, therefore, set aside the order of the Commissioner of Income-tax (Appeals) and directed the Income-tax Officer to allow the entire amount claimed by the assessee as capital expenditure incurred for scientific research. It is against the above finding, the Revenue has come up in reference.

The relevant provisions under section 35 read as follows:

"35. 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 specific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of subsection (2):

(2) For the purposes of clause (iv;) of subsection (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:

provided that no deduction shall be admissible under this clause in respect of any expenditure incurred on the acquisition of any land. Whether the land is acquired as such or as part of any property, after the 29th day of February, 1984.

Explanation 1.---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:

Explanation 2.---For the purposes of clause,--

(a) 'land' includes any interest in land; and '

(b) the acquisition of any land shall be deemed to have been made by the assessee on the date on which the instrument of transfer of such land to him has been registered under the Registration Act, 1908 (16.of 1908), or where he has taken or retained the possession of such land or any part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), the date on which he has so taken or retained possession of such land or part."

It is relevant to note that Explanation 2 was inserted to the proviso with effect from April 1, 1984.

On the facts, the Tribunal found that pursuant to an allotment made by the Gujarat Industrial Development Corporation in August, 1978, possession of the land and the shed concerned as handed over to the assessee on September 4, 1978. The agreement for sale was executed on September 28, 1978. The assessee has also paid the amount due as per the agreement and was willing to perform his part of the contract. It was, therefore, found that all the ingredients necessary as prescribed in section 53A of the Transfer of. Property Act were satisfied and, therefore, the land and building would be deemed to have been acquired by the assessee during the previous year relevant to the assessment year 1980-8i. The Tribunal, therefore, came to the conclusion that assessee had incurred capital expenditure pertaining to the land and building for the purpose of scientific research, which is fully allowable under the provisions of section 35(1)(iv) of the Income-tax Act for the assessment year 1980-81. It also referred to the provisions contained in Explanation 2 and took the view that the above provision should be considered as declaratory of the law and should be made applicable to the relevant assessment year in the case of the assessee in this case.

We find that the Tribunal was correct in its interpretation of section 35(1)(iv), (ia) (sic) in order to get the benefit of deduction in respect of capital expenditure on scientific research. It is sufficient that the capital expenditure is incurred in the previous year as provided under the provisions of section 35. It is not necessary that the ownership over the land and building should have been acquired by the assessee in the previous year. We are also of the view that the Tribunal has correctly found that Explanation 2 is declaratory in nature and, therefore, it would be made applicable for the relevant assessment year also, even though, the Explanation had come into the statute only with effect from April 1, 1984.

In the light of the above, we answer the question referred in the affirmative, in favour of the assessee and against the Revenue.

A copy of this judgment under the seal of this Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

M.B.A./40/FCReference answered.