High Court allows deduction for capital expenditure on building for scientific research pre-use

The High Court ruled in favor of the assessee, holding that they are entitled to the deduction under section 35 of the Income-tax Act, 1961, for capital expenditure on a building intended for scientific research, even if the building was under construction and not yet put to use during the relevant assessment years. The court emphasized that the deduction is based on incurring expenditure for research purposes, not on the actual use of the asset, and that the legislative intent of the provision is to incentivize research and development activities.

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Issues Involved:
1. Entitlement to deduction under section 35 of the Income-tax Act, 1961, for capital expenditure on a building under construction and not put to use for research and development purposes.

Detailed Analysis:

1. Entitlement to Deduction under Section 35 of the Income-tax Act, 1961:

The primary issue revolves around whether an assessee can claim a deduction under section 35 of the Income-tax Act, 1961, for capital expenditure incurred on a building intended for scientific research, even if the building is under construction and not yet put to use for research and development purposes during the relevant assessment years.

The assessee, a private limited company engaged in manufacturing aluminum extruded sections, constructed a building for scientific research and claimed a deduction under section 35(1)(iv) read with section 35(2) of the Act for the assessment years 1981-82 and 1982-83. The construction was completed on October 25, 1981, as certified by the architect. However, the Income-tax Officer disallowed the deduction on the grounds that the building was not used for scientific research during the assessment years in question.

Upon appeal, the Commissioner of Income-tax (Appeals) allowed the deduction, stating that it was not necessary for the building to be put to use to avail of the deduction under section 35. The Tribunal upheld this decision, leading to the Revenue's appeal to the High Court.

The Revenue argued that the deduction under section 35 should only be allowed if the building was used for research and development, emphasizing the purpose behind the section to incentivize research activities. They contended that the asset must be both acquired and used for research to qualify for the deduction.

Conversely, the assessee argued that section 35 does not explicitly require the asset to be used for research during the relevant year. They cited judgments from the Karnataka High Court, including CIT v. H.M.T. Ltd. [1993] 199 ITR 235 (Karn) and Ravi Machine Tools (P.) Ltd. v. CIT [1978] 114 ITR 459 (Karn), to support their claim that actual use is not a prerequisite for the deduction.

The High Court considered the legislative intent behind section 35, which aims to encourage research and development by providing deductions for capital expenditure. The court noted that the provision should be construed liberally in favor of the assessee. The court also referred to Circular No. 5-P (LXXVI-63) of 1967, which clarified that capital expenditure on scientific research incurred after March 31, 1967, should be fully deductible in the year it is incurred, without necessitating the use of the asset.

The court concluded that the Revenue's interpretation would deprive the assessee of the intended benefit, as the deduction is based on incurring expenditure rather than the asset's use. The court emphasized that the deduction is not akin to depreciation, which requires actual use of the asset. Instead, it is an incentive for incurring expenditure on scientific research.

The court held that once the expenditure is incurred for scientific research and the conditions of section 35 are met, the Revenue cannot deny the deduction based on the asset's non-use during the relevant year. The court affirmed that the Tribunal was correct in upholding the Commissioner of Income-tax (Appeals)'s decision to allow the deduction.

Conclusion:

The High Court answered the question in the affirmative, ruling in favor of the assessee and against the Revenue. The court held that the assessee is entitled to the deduction under section 35 of the Income-tax Act, 1961, for capital expenditure on a building intended for scientific research, even if the building is under construction and not yet put to use during the relevant assessment years. The reference was disposed of with no order as to costs.

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