The judgment of RANGANATHAN and RAMA JJ., was delivered by
RANGANATHAN J. JEEVAN REDDY J. delivered a separate concurring judgment.
RANGANATHAN J. -The seeds of the present controversy were
sown as early as in 1946. It is unfortunate that this matter should be coming up
before this court for its consideration nearly five decades later, though it
must be pointed out that the issue in its present form is the outcome of an
amendment made by the Finance (No. 2) Act, 1980 (hereinafter referred to as
" the 1980 Act " to the Income-tax Act, 1961 (hereinafter referred to
as " the 1961 Act " It is also a curious coincidence that the 1980 Act
effected two amendments in the 1961 Act with retrospective effect and the
validity of both these provisions has been challenged before the courts. The
first was the controversy with regard to the retrospective amendment of section
80J which was settled by this court by its decision in Lohia Machines Ltd. v.
Union of India [1985] 152 ITR 308. It is the second amendment to the provisions
contained in section 35(2) of the 1961 Act that has given rise to the present
controversy between the parties.
The question is really one of interpretation of two
important provisions relating to the computation of business income for purposes
of income-tax. We may start with the provisions of the Indian Income-tax Act,
1922 (hereinafter referred to as " the 1922 Act " ). The computation
of business income for purposes of income-tax was done in accordance with the
provisions of section 10 of the said Act. In the process of making such
computation, the Act provided for two important deductions (among others ), in
respect of the capital assets employed in the business. The first was the
deduction under clause (vi) of section 10(2) of an allowance in respect of the
depreciation of building, machinery, plant or furniture being the property of
the assessee and used for the purposes of the business, at a prescribed
percentage of the written down value of such assets. This allowance is
calculated, in respect of the year of acquisition of the property, at a
percentage of its actual cost to the assessee and, in subsequent years, at a
graduated scale on the basis of the actual cost less the depreciation allowances
granted in the preceding years. In strict principle, this is an allowance of
capital nature but it is now well-settled that the allowance of depreciation has
to be taken into account in order to ascertain the true profits of a business
and, therefore, an assessee is permitted to deduct, in the computation of the
business income year after year, the prescribed percentage of the value of the
assets used for the purposes of business. The second allowance was not there in
the 1922 Act originally and was introduced by the Income-tax (Amendment) Act,
1946. The introduction was of certain allowances in respect of expenditure on
" scientific research related to the business ", an expression which
was defined in a fairly comprehensive manner by the statute. Three types of
allowances were permitted in respect of this category of expenditure of which we
are here concerned with only one. This provision was contained in clause (xiv)
of section 10(2) which permitted deduction :
"in respect of any expenditure of a capital nature on
scientific research related to the business, an allowance for each of the five
consecutive previous years beginning with the year in which the expenditure was
incurred, or where the expenditure was incurred prior to the commencement of the
business, for each of the five consecutive previous years beginning with the
year in which the business was commenced, equal to one-fifth of such expenditure
:
Provided that no allowance shall be made for any
expenditure incurred more than three years before the commencement of the
business :
Provided further that-.
(d) where a deduction is allowed for any previous year
under this clause in respect of expenditure represented wholly or partly by any
asset, no deduction shall be allowed under clause (vi) or clause (vii) for the
same previous year in respect of that asset ;
(e) where an asset is used in the business after it ceases
to be used for scientific research related to that business, and a claim for an
allowance under clause (vi) or clause (vii) is made in respect of that asset,
the actual cost to the assessee of the asset shall be treated as reduced by the
amount of any deductions allowed under this clause; "
A cursory and conjoint reading of section 10(2)(vi) and
section 10(2)(xiv) suggests that, where an assessee incurs expenditure of a
capital nature on scientific research related to the business and the
expenditure results in the acquisition of an asset, the assessee can claim,
under clause (vi), a deduction of the specified percentage of the written down
value of the asset and, under clause (xiv), he can ask for a deduction, in five
consecutive years, of the expenditure he has incurred on the acquisition of the
asset. For thi
