TMI Blog2003 (1) TMI 740X X X X Extracts X X X X X X X X Extracts X X X X ..... to 1986-88 and were sold in the year under consideration and before they ceased to be scientific research without using them in the business. These assets were thus held for more than 36 months and consequently they were long term capital assets on the date of sale. The sale consideration to the extent of cost as was allowed under section 35 was assessed to tax under section 41(3) of the Act. The difference between the cost as increased to indexed cost and sale consideration was claimed as a long term loss under the head capital gain . It is also claimed as loss under the head business . The position of the cost, the sale price, the indexed cost and the loss in tabulated as under:- Particulars Cost as Increase on Sale Consider- Loss wit Loss wit Allowed account of ation assessed reference reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer did not accept the claim of loss on sale of these R D assets and the reasons given are as under:- (1) Although R D are in the nature of capital but expenditure on these assets has been allowed as revenue expenses under section 35(1)(iv) of the Act, therefore, capital gain on the transfer of these assets cannot be computed as whole of the expenditure on these assets has already been allowed as revenue expenses at the time of computing the business income in the year of its purchase. On account of allowing 100% depreciation in respect of these expenditure on these assets actual cost has become Rs. zero. Consequent upon transfer of these assets, whole of the sale proceeds has to be taxed as income under section 41(3) of the Act. (2) Without prejudice to the above mentioned finding it is further emphasised that capital gain is always computed with reference to the actual cost in the hand of the concerned person. Since the actual cost of the transferred R D assets in the hands of the assessee company the following deduction under section 35 of the Act is zero as per the provisions of section 43 of the I.T. Act, the whole of the sale proceeds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the nature of the R D assets. I hold that there is no dispute in respect of the fact that R D assets were very much business assets only and as Co. 100% revenue expenses were allowed on these assets, actual cost of the same has been zero in the hands of the assessee company and any sale proceed received thereafter consequent upon the transfer of these assets has to be taxed as revenue receipt only. 5. The CIT(A) upheld the order of the Assessing Officer on both the counts. On the first issue, he followed his order in appeal under section 154 against the prima facie adjustment under section 143(1)(a) wherein he observed at page 2 of his order as under:- I have considered the facts and appellant s submissions. It is relevant to note that the Assessing Officer has discussed the relevant facts in detail before disallowing the appellant s claim for loss on the sale of the assets used in scientific research. The Assessing Officer has highlighted the fact that since 100% deduction of the expenses incurred for acquiring the said assets had already been given under section 35(1)(iv) read with section 35(2)(ia), the amount of proceeds on the sale of the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer has mentioned that the appellant has claimed set off of the alleged capital loss against business income. The Assessing Officer has mentioned that apart from the fact that the appellant s claim for the set off of the alleged capital loss against the business income is in violation of the amended provisions of section 71 applicable for the assessment year 1992-93 onwards, amount of receipt on the sale of research and development (scientific research) assets is to be dealt with as per the provisions of section 41(3). Accordingly, the Assessing Officer has rejected the appellant s claim for set off of the alleged loss on the sale of research and development assets. The appellant has repeated the submissions made in this regard before the Assessing Officer. It is contended that its claim for the set off of the alleged loss on the sale of research and development (scientific research) assets is in keeping with the statutory provisions, and that the Assessing Officer s action in rejecting the appellant s claim in this regard is unwarranted. I have considered the facts and appellant s submissions. Apart from the fact that the appellant s claim for set off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising on transfer of these assets because the entire cost thereof has been allowed as a deduction. The ld. DR also distinguished the cases relied upon by the learned counsel of the assessee by stating that all these cases were for computing capital employed which has distinguished the Supreme Court decision on the ground that the Legislature intended to give an additional deduction under section 80J and, therefore, there was no question of double deduction while computing the income of the assessee under section 28 of the Act. On the contrary the cost of acquisition of the assets is being claimed by the assessee twice over in the present case - once under section 35 and again under section 48 of the Act. As regards the alternative claim of the assessee that the loss should be allowed to be set off against the business income, he submitted that no loss has been incurred by the assessee under the head business and the computation of the loss in any case is worked out by the assessee himself under the provisions of section 48 of the Act by adopting indexed cost which is to be adopted only while computing the profit or gain under the head capital gain . It would be in clear violat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of the asset has been allowed as a deduction under section 35 of the Act neither the asset ceases to be capital asset nor the cost thereof ceases to cost of acquisition. The observations of the departmental authorities that by allowance of 100% deduction under section 35, the cost becomes zero has no force. 9. The submission of the Revenue that, if the entire cost which has been allowed as deduction under section 35 is again allowed as cost of acquisition while computing capital gain would amount to double deduction in the light of Supreme Court decision in the case of Escorts Ltd. (supra) has also no force. In the said decision the court held at page 58 of the reports as under:- ....There is a basic Legislative scheme, unspoken but clearly underlying the Act, that two allowances cannot be, and are not intended to be, granted in respect of the same asset or expenditure,........ 10. In the head-note it is observed that Where a capital asset used for scientific research related to the business of the assessee is also ipso facto an asset used for the purpose of the business, it is impossible to conceive of the Legislature having envisaged a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere such decisions. In these two decisions referred to above and the other decisions of Bombay High Court, Karnataka High Court referred to above and another decision of Bombay High Court in the case of CIT v. Pyrene Rai Metal Treatment Ltd. [1993] 203 ITR 752 the cost of such assets was held to be includible in computing the capital employed irrespective of the fact that the entire cost thereof has been allowed as a deduction under section 35 of the Act and in spite of the fact that Explanation 1 to section 43(1) specifically excludes the amount of deduction under section 35 from the cost of acquisition and the meaning of the term cost of acquisition as defined in section 43(1) has been adopted as cost of the assets for the purposes of capital employed under section 80J of the Act. In the judgments of A.L.A. Chemicals (P.) Ltd. s case (supra) of the Bombay High Court and of Sarabhai Sons (P.) Ltd. s case (supra) of Gujarat High Court, the decision in the case of Escorts Ltd. (supra) was considered and distinguished on the ground that the deduction for depreciation under section 32 and for cost of scientific research assets under section 35 both are under Chapter IV to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains of business or profession, the expenditure incurred for scientific research becomes a permissible deduction. Deduction by way of depreciation is permitted as the capital asset depreciates in value as a result of its use. Such deduction is permitted while computing the total income of the assessee. Section 80J was enacted for the purpose of giving an incentive to entrepreneurs to establish new industrial undertakings and for certain other purposes. It provided for deduction, no doubt, while computing the total income of the assessee, but on a different basis. The deduction was provided to encourage establishment of new industrial undertakings and for that reason, the deduction was related to the capital employed in the new industrial undertakings. Whereas expenditure on scientific research is made deductible under section 35 on the ground that it is expenditure incurred for the purpose of scientific research related to the business of the assessee, the deduction contemplated by section 80J is not because of the fact that the assessee has incurred expenditure on scientific research related to his business but because he has employed capital in establishing a new in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indexed cost of any improvement had respectively been substituted. The indexed cost of acquisition has been defined in clause (iii ) of the Explanation to section 48 which reads as under:- (iii) indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later, . The claim of allowance of this statutory increase in cost is not on account of double deduction but on account of inflation index and is contemplated and provided by the second proviso to section 48 itself and to that extent, there cannot be any claim for double deduction. It is in fact not a cost of double deduction at all as the increase in cost on account of inflation index has never been subject-matter of any allowance earlier. The Legislature itself has allowed the extra benefit to the assessee and those cases would fall in the category of decision dealing with deduction under section 80J referred to ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain and, therefore, the same cannot be allowed as a business loss even though the asset was used for the purposes of business before its sale. The provisions of section 71(2) are not applicable to such loss. Secondly, the provisions of section 71(3) are clear which provide for the set off and carry forward of the loss arising under the head capital gain in a specific manner. For the sake of convenience, we reproduce here the provisions of section 71(3) of the Act as under:- Where in respect of any assessment year, the net result of computation under the head capital gain is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to have such loss set off against the income under the other head. There is thus a specific ban for setting off the loss under the head capital gain against any other head which includes the head under which the business income is computed. We, therefore, do not find any merit in this claim of the assessee and the same is accordingly, rejected. The Supreme Court decision in the case of Western States Trading Co. (P.) Ltd. (supra) and the Gujarat High Court decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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