1993 (7) TMI 38 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal erred in law in not following the decision of the Supreme Court to hold that the electronic business of the company was an indivisible business and not liable to be bifurcated, and that all the expenditure under the Alpha Electro Division was allowable deductions.
2. Whether the Tribunal was correct in law in holding that the electronic business of the company is divisible into two divisions and that only expenditure in respect of one division is allowable.

Summary of Judgment:

Issue 1:
The Tribunal did not err in law by not following the Supreme Court's decision to hold that the electronic business of the company was indivisible. The assessee-company claimed a deduction for an expenditure of Rs. 15,06,803 related to the Alfa Electro Unit, which was mainly for research work. The Income-tax Officer disallowed the claim, noting that the scientific research did not relate to the existing business as it had not commenced. The directors and auditors reported that no manufacturing activity was carried out, and the expenses were shown as pre-operative. The Commissioner (Appeals) and the Tribunal both upheld this view, distinguishing the case from the Supreme Court's decision in B. R. Ltd. v. V. P. Gupta, CIT [1978] 113 ITR 647, which dealt with different facts. The court found no material to show that the instruments division and the mini-computer division were part and parcel of the same business. The oral assertion of unity and control was insufficient to claim the research expenditure for the mini-computer division.

Issue 2:
The Tribunal was correct in law in holding that the electronic business of the company is divisible into two divisions. The Commissioner (Appeals) noted that Alfa Electro Unit had two divisions: instruments division and mini-computer division. The instruments division was a small-scale unit, while the mini-computer division required a separate industrial licence and involved large-scale operations. The Commissioner (Appeals) directed the Income-tax Officer to allow expenses related to the instruments division but disallowed those related to the mini-computer division. The Tribunal agreed with this conclusion, and the court found that the mini-computer division was a different unit requiring a separate industrial licence, which had not been issued. The facts showed that no operations had been carried out for setting up the mini-computer division, and the instruments division's operations were suspended. Therefore, the court held that the two divisions did not form part of the same business.

In conclusion, the first question was answered in the negative, and the second question was answered in the affirmative, both in favor of the Revenue.