Depreciation on research assets and capital employed relief turn on exclusion of written-off cost and borrowed funds

Depreciation on building and plant used for business research was disallowed because, under the controlling Supreme Court interpretation applicable before amendment, depreciation could not be claimed on the portion of a scientific research asset's cost already written off. Borrowed moneys, debts and liabilities were required to be excluded when computing capital employed for relief under section 80I, so the assessee's wider computation was rejected. The reference was therefore resolved by applying binding Supreme Court authority: the assessee failed on the depreciation issue, while the Revenue succeeded on exclusion of debts and liabilities from capital employed.

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Issues: (i) Whether the assessee was entitled to depreciation on the written down value of building and plant used for research relating to its business. (ii) Whether debts and liabilities were required to be deducted while computing capital employed for relief under section 80I.

Issue (i): Whether the assessee was entitled to depreciation on the written down value of building and plant used for research relating to its business.

Analysis: The issue was treated as concluded by the Supreme Court's ruling that, before the relevant amendment, the Act did not permit depreciation in respect of the cost of a capital asset acquired for scientific research to the extent that such cost had been written off under the applicable provisions. The Court followed that binding position.

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

Issue (ii): Whether debts and liabilities were required to be deducted while computing capital employed for relief under section 80I.

Analysis: The issue was governed by the Supreme Court's ruling that borrowed moneys and debts must be excluded while computing capital employed for the purpose of the relief claimed under the statute. The Court applied that principle to the reference before it.

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

Final Conclusion: The reference was disposed of by applying binding Supreme Court authority, with the assessee losing on the depreciation question and the Revenue succeeding on the computation of capital employed.

Ratio Decidendi: Where a controlling Supreme Court decision has settled the interpretation, depreciation on research assets cannot be allowed to the extent the cost has been written off, and borrowed moneys and debts must be excluded in computing capital employed for statutory relief.

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