Scientific research deduction depends on incurring capital expenditure, not immediate ownership of land or building.

Central subsidy was not required to be reduced from the cost of assets for depreciation and investment allowance, the issue having been treated as settled by binding Supreme Court authority in favour of the assessee. Capital expenditure on land and building used for scientific research was deductible under section 35 even though legal ownership vested later, because the decisive factor was incurring the expenditure in the relevant previous year; possession under an agreement satisfying part performance was accepted, and the declaratory Explanation 2 applied to the assessment year. Both points were resolved against the Revenue and in favour of the assessee.

---

---

Issues: (i) Whether central subsidy received had to be reduced from the cost of the asset for the purposes of depreciation and investment allowance; (ii) Whether capital expenditure on land and building used for scientific research was deductible under section 35 of the Income-tax Act despite ownership of the property vesting later.

Issue (i): Whether central subsidy received had to be reduced from the cost of the asset for the purposes of depreciation and investment allowance.

Analysis: The issue was treated as concluded by the binding Supreme Court decision in the assessee's favour, and the reference was answered consistently with that position.

Conclusion: The question was answered in the negative, against the Revenue and in favour of the assessee.

Issue (ii): Whether capital expenditure on land and building used for scientific research was deductible under section 35 of the Income-tax Act despite ownership of the property vesting later.

Analysis: Deduction under section 35 depends on the incurring of capital expenditure in the relevant previous year, not on the assessee acquiring legal ownership of the land and building in that year. The Tribunal's finding that possession had been taken under an agreement satisfying the requirements of part performance was accepted, and Explanation 2 was treated as declaratory and therefore applicable to the assessment year in question.

Conclusion: The question was answered in the affirmative, in favour of the assessee and against the Revenue.

Final Conclusion: Both references were answered in favour of the assessee, and the Revenue's challenge failed on the substantive tax issues decided.

Ratio Decidendi: For deduction of capital expenditure on scientific research, it is sufficient that the expenditure was incurred in the relevant previous year; acquisition of ownership of the land or building in that year is not necessary, and a declaratory statutory explanation may apply to pending assessment years.

---