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Issues: (i) Whether the statutory deduction under section 36(1)(viii) of the Income-tax Act, 1961, is to be computed on the total income before allowing that deduction; (ii) Whether interest claimed on amounts due from a company in financial distress had accrued as income and was includible in the assessee's income; (iii) Whether expenditure on investigation, research and feasibility study was revenue expenditure allowable as a deduction.
Issue (i): Whether the statutory deduction under section 36(1)(viii) of the Income-tax Act, 1961, is to be computed on the total income before allowing that deduction.
Analysis: The computation of total income for the purpose of section 36(1)(viii) had to be made in accordance with the general computation provisions, but without first reducing the income by the deduction under that very clause. The special deduction was intended to be calculated on the total income as computed before the allowance of the deduction itself. The cited reasoning was treated as consistent with the broader scheme of computation under the Act.
Conclusion: The issue was answered in favour of the assessee and against the Revenue.
Issue (ii): Whether interest claimed on amounts due from a company in financial distress had accrued as income and was includible in the assessee's income.
Analysis: On the facts found, there was no realistic chance of recovery of the interest, the debtor company was under severe financial distress, and the assessee had not treated the amount as income in its accounts. Applying the principle of real income, the Court accepted that income is taxable only when it has really accrued or arisen in the practical sense, and not where the surrounding facts show that no real income resulted.
Conclusion: The issue was answered in favour of the assessee and against the Revenue.
Issue (iii): Whether expenditure on investigation, research and feasibility study was revenue expenditure allowable as a deduction.
Analysis: The question was treated as covered by the earlier decision concerning the same assessee, where such expenditure was held to be revenue in nature and allowable as a deduction. That view was followed for the years in question.
Conclusion: The issue was answered in favour of the assessee and against the Revenue.
Final Conclusion: All the referred questions were decided in favour of the assessee, and the Revenue's challenge failed on every substantive point.
Ratio Decidendi: For computing a statutory deduction linked to total income, the deduction itself cannot first be deducted from the base; income is taxable only when it has really accrued as real income; and expenditure on investigation, research and feasibility study may be revenue expenditure when its character is so determined on the facts and binding precedent.
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