Disallowance of Depreciation if Deduction under Section 35 Granted; Capital Expenditure Inclusion in Section 80J Base

The court ruled that the assessee is not entitled to claim depreciation allowance under section 32 for assets on which a deduction under section 35 has already been granted. However, the court allowed the inclusion of capital expenditure on scientific research and development in the capital base for the purpose of section 80J, even if a full deduction under section 35 has been granted.

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Issues Involved:
1. Entitlement to depreciation allowance under section 32(1) when a deduction under section 35(1)(v) has already been granted.
2. Inclusion of capital expenditure on scientific research and development in the capital base for computation of deduction under section 80J.

Issue-wise Detailed Analysis:

Issue 1: Entitlement to Depreciation Allowance under Section 32(1)
The first question addressed whether the assessee-company was entitled to depreciation on capital assets used for scientific research and development, even though full deduction was granted under section 35 in previous years. The court referenced the Supreme Court decision in Escorts Ltd. v. Union of India, which established that an assessee is not entitled to depreciation allowance under section 32 when a deduction under section 35 has been granted. Consequently, the first question was answered in the negative and in favor of the Revenue, indicating that the assessee is not entitled to claim depreciation under section 32 for assets on which deduction under section 35 has already been granted.

Issue 2: Inclusion of Capital Expenditure in Capital Base for Section 80J
The second question examined whether the capital expenditure on scientific research and development should be included in the capital base for the purpose of section 80J, despite full deduction under section 35. The court noted the retrospective amendment to section 80J by the Finance (No. 2) Act, 1980, effective from April 1, 1972. The relevant provision, section 80J(1), allows a deduction computed as a percentage of the capital employed in the industrial undertaking.

The court clarified that, per the Supreme Court decision in Escorts Ltd., no depreciation can be allowed on assets used for scientific research and development if a deduction under section 35 has been granted. However, for the purpose of section 80J, these assets fall under category (ii) of section 80J(1A)(II), meaning their actual cost to the assessee should be considered in the capital computation. The term "actual cost" as defined in section 43(1) means the price paid by the assessee, not reduced by the deduction allowed under section 35.

The court rejected the Revenue's argument that including the cost of these assets in the capital base would result in a double deduction. It emphasized that deductions under sections 32 and 35 relate to the computation of total income (Chapter IV), whereas section 80J pertains to additional deductions from the gross total income (Chapter VI-A). Therefore, the nature of deductions under section 80J is different from those under sections 32 and 35, and the ratio of the Supreme Court judgment in Escorts Ltd. does not apply to section 80J.

The court also noted that section 43(1) does not require the actual cost to be reduced by the deduction under section 35, except in specific circumstances outlined in the Explanation to section 43(1). The Andhra Pradesh High Court and a previous Division Bench of the Bombay High Court had similarly concluded that assets used for scientific research do not cease to be capital employed merely because a deduction under section 35 was granted.

Therefore, the second question was answered in the affirmative and in favor of the assessee, allowing the inclusion of the capital expenditure on scientific research and development in the capital base for the purpose of section 80J.

Conclusion:
1. The assessee is not entitled to depreciation allowance under section 32 when a deduction under section 35 has already been granted.
2. The capital expenditure on scientific research and development can be included in the capital base for the purpose of section 80J, even if a full deduction under section 35 has been granted.

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