COMMISSIONER OF INCOME-TAX VS YAMUNA DIGITAL ELECTRONICS (P.) LTD.
2001 P T D 282
[238 I T R 717]
[Andhra Pradesh High Court (India)]
Before Ms. S. V. Maruthi and R. Bayapu Reddy, JJ
COMMISSIONER OF INCOME-TAX
versus
YAMUNA DIGITAL ELECTRONICS (P.) LTD.
Case Referred No 62 of 1990, decided on 17/08/1998.
(a) Income-tax---
----Scientific research---No requirement that expenditure should be wholly and exclusively for research and development---Proportionate deduction on basis of part use of plant and machinery for research---Permissible---Indian Income Tax Act, 1961, S.35.
The Tribunal was justified in law in affirming the order of the Commissioner of Income-tax (Appeals) allowing 50 per cent. of the cost of equipment as attributable to research, on the view that the research and development in the case of the assessee in electronic business was a continuous process acid all the research and development was a preparation for commercial production.
(b) Income-tax---
----Hundis---Whether transactions hundis---Tribunal following its decision in holding transactions not hundis---Tribunal's decision in that other case affirmed by High Court---Transactions in question also nothundis Indian Income Tax Act, 1961, S.69D.
During the examination of the accounts of the assessee-company for the assessment years 1981-82 and 1982-83, the Income-tax Officer found that certain sums were borrowed on documents in the form of hundis in respect of which the repayments were made by the assessee into the bank for credit to the accounts of various creditors. The Income-tax Officer rejected the assessee's contention that these transactions were not hit by section 69D of the Income Tax Act, 1961. This was confirmed on appeal. On further appeal, however, the Tribunal, following its own decision in the case of another assessee "I", held that the transactions in dispute were not hundis. On a reference:
Held, that since the Tribunal followed its own judgment in the case of "I" in holding that the transactions covered in the present case were not hundis and since the judgment of the Tribunal in that case was upheld by the Court in CIT v. Dexan Pharmaceuticals (Pvt.) Ltd. (1995) 214 ITR 576 (AP), in the present case also the transactions were not hundi transactions and section 69D was not applicable.
CIT v. Dexan Pharmaceuticals (Pvt.) Ltd. (1995) 214 ITR 576 (AP) fol.
From a reading of section 35 of the Income Tax Act, 1961, it is clear that it does not say that the expenditure should be wholly and exclusively used for research and development. In the absence of the words "wholly and exclusively used for research and development", in the section, as long as the expenditure is for scientific research relating to the business carried on by the assessee; the assessee is entitled to deduction of the claim.
S.R. Ashok for the Commissioner.
S. Ravi for the Assessee.
JUDGMENT
Ms. S. V. MARUTHI, J.---The following three questions were referred by the Tribunal at the instance of the Revenue for the opinion of this Court:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the transaction though describe as hundi is really not a hundi transaction?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the provisions of section 69D cannot be applied in respect of transactions where the identity is established and the loan is genuine?
(3) Whether, on the facts and circumstances of the case despite the absence of any specific provision for the grant of any proportionate deduction under section 35(1)(iv) read with section 35(2) of the Act, the Income-tax Appellate Tribunal was justified in law in allowing 50 per cent. of the cost of equipment as attributable for research?"
The facts in brief are as follows:
The assessee is a company. During the examination of accounts for the assessment years 1981-82 and 1982-83, some hundi transactions were noted by the Income-tax Officer. On going through the details it was found that while a sum of Rs.70,000 was borrowed on promissory notes, another sum of Rs.32,500 was borrowed on the documents in the form of hundis in respect of which the repayments were made by the assessee into the bank for credit to the accounts of various creditors. For the assessment year 1982-83 also, the assessee was similarly found to have borrowed on hundis and also made repayments against such borrowers. Amounts repaid by them were worked out to Rs.1,45,000 and Rs.8,850 as interest thereon. The assessee contended that these transactions were not hit by section 69D of the Income-tax Act. The Income-tax Officer did not accept the said contention. On appeal by the assessee, the Commissioner of Income-tax also held that they are hundi transactions and are, therefore, hit by section 69D of the Income-tax Act. On further appeal to the Tribunal, the Tribunal following its own judgment in R.A. No.23/Hyd of 1985, dated December 31, 1986 in CIT v. Instrument Techniques (P.) Ltd., held that: "the transactions in dispute are not hundis". Aggrieved by the same, the Revenue has sought a reference of questions Nos. (1) and (2) for the opinion of this Court.
The judgment of the Tribunal in CIT v. Instrument Techniques (P.) Ltd., came up for consideration along with Dexan Pharmaceuticals (Pvt.) Ltd. viz., CIT v. Dexan Pharmaceuticals (Pvt.) Ltd. (1995) 214 ITR 576 (AP). This Court while considering whether a particular transaction is of hundi or not laid down the following tests (page 581):
"(1) There are always three parties to such a transaction. They are the drawer, the drawee and the payee. The drawer cannot himself also be the drawee. If the transaction is bilateral it is very strong indication to show that it is not a hundi transaction.
(2) A hundi is payable to satisfy a person or order but negotiable without endorsement by the payee.
(3) The holder of a hundi is entitled to sue on its basis without any endorsement in his favour.
(4) A hundi once accepted by the donee, could be negotiate endorsement.
(5) In the case of loss of a hundi, the owner can claim duplicate from the drawer and present the same to the c claiming payment.
(6) A hundi is normally in the oriental language as per the custom. "
Applying those tests, the learned Judges have held that the transaction in Instrument Techniques (Pvt.) Ltd.'s case as well as in Dexan Pharmaceuticals (Pvt:) Ltd.'s case (1995) 214 ITR 576 (AP), is not a hundi transaction and, therefore, section 69D is not applicable.
Since the Tribunal followed their own judgment in Instrument Techniques (Pvt.) Ltd.'s case in holding that the transactions covered in the present case are not hundi and since the judgment of the Tribunal in Instrument Techniques (Pvt.) Ltd.'s case was upheld by this Court in Dexcan Pharmaceuticals (Pvt.) Ltd.'s case (1995) 214 ITR 576, we answer questions Nos. (1) and (2) in the affirmative, in favour of the assessee and against the Revenue.
As regards question No.3, the assessee claimed deduction of plant and machinery worth about Rs.1,35,417 under section 35 of the Income-tax Act on the ground that the said machinery was used in the research and development division. The Income-tax Officer on the strength of the investigation and after recording the statements of the two executives of the company rejected the claim. On appeal, the Commissioner of Income-tax partly allowed the assessee's claim on the ground that the research and development in the case of the company in electronic business was a continuous process and all the research and development was the preparation for commercial production. Holding as above, he allowed 50 per cent. of the claim of the assessee. On appeal, the Tribunal confirmed the view expressed by the Commissioner of Income-tax (Appeals). However, the Tribunal referred the third question for the opinion of this Court at the instance of the Revenue.
The main argument of learned counsel for the Revenue is that deduction cannot be allowed as the finding of the Tribunal as well as the Commissioner of Income-tax is that only plant and machinery are partly used for the purpose of research and development and as long as it is not wholly used for research and development the assessee is not entitled for deduction of the claim. It is difficult to accept the contention of the Revenue as the language used in section 35 of the Income-tax Act reads as follows:
"(35)(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 subsection (1),---
(i) in a case where such capital expenditure is incurred before the 1st day of April, 1967, one-fifth of the capital expenditure incurred in any previous year shall be deducted for that previous year; and the balance of the expenditure shall be deducted in equal instalments for each of the four immediately succeeding previous years."
From a reading of the section, it is clear that it does not say that the expenditure should be wholly and exclusively used for research and development. In the absence of the words "wholly and exclusively used for research and development", in the section contention of the Revenue cannot be accepted. Hence, the expenditure which is of a capital nature as long as it is used for scientific research relating to the business carried on by the assessee, the assessee is entitled for the deduction of the claim.
We, therefore, answer question No.3 referred by the Tribunal in the affirmative, in favour of the assessee and against the Revenue.
The reference is answered accordingly.
M.B.A./145/FC
Reference answered.