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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
Mohammad Sharif and S.R. Rajashekhara Murthy, JJ.
Commissioner of Income Tax, Karnataka —Appellant
Vs.
International Instruments (P) Ltd. —Respondent
Decided on : 14-09-1983
Depreciation - Scientific Research - Section 35, Companies (Profit) Surtax Act, 1964, Section 40A(5), Section 220(2) - The court discussed the applicability of depreciation on capital assets used for scientific research, the admissibility of surtax as a deduction in computing business profits, the disallowance of interest payable under section 220(2) and the applicability of section 40A(5) to remuneration paid to directors of the assessee company.
Fact of the Case:
The assessee, a private limited company, claimed depreciation under s. 32 of the I. T. Act for capital assets used for scientific research. The Department disallowed the claim. The Tribunal upheld the disallowance of surtax as a deductible item in computing business profits, but allowed the claim for remuneration paid to directors of the assessee company.
Finding of the Court:
The court held that the assessee was not entitled to depreciation on capital assets used for scientific research due to an amendment to s. 35 with retrospective effect. It also held that surtax payable by the assessee was not admissible as a deduction in computing its total income. The court further held that interest payable under s. 220(2) of the I. T. Act was not an allowable deduction, but section 40A(5) was not applicable to the remuneration paid to directors of the assessee company.
Issues: The issues involved the admissibility of depreciation on capital assets used for scientific research, the deductibility of surtax in computing business profits, the disallowance of interest payable under section 220(2), and the applicability of section 40A(5) to remuneration paid to directors of the assessee company.
Ratio Decidendi: The court's decision was based on the retrospective amendment to s. 35, which rendered the assessee ineligible for depreciation on capital assets used for scientific research. The court also relied on legal provisions and precedents to determine the inadmissibility of surtax as a deduction, the disallowance of interest payable under section 220(2), and the inapplicability of section 40A(5) to the remuneration paid to directors of the assessee company.
Final Decision: The court decided in favor of the Department regarding the inadmissibility of depreciation on capital assets used for scientific research, the disallowance of interest payable under section 220(2), and the inapplicability of section 40A(5) to the remuneration paid to directors of the assessee company. However, it decided in favor of the assessee regarding the deductibility of surtax in computing business profits.
Rajasekhara Murthy, J.—The following four question have been referred for opinion of this court by the Income Tax Appellate Tribune, Bangalore bench :
" (1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to deprecation on capital assets which were utilised for scientific research during the previous years relevant to the assessment year 1975-76, although such assets have been purchased and brought into use for scientific research in the earlier years and full deduction under section 35 had bene given in those years ?
(2) Whether, on e fact and in the circumstances of the case, the Tribunal was right in holding that surtax payable under the Companies (Profit) Surtax Act, 1964, was an inadmissible deduction in computing the total income of the assessee?
(3) Whether, on the facts and in the circumstances of the case, the interest payable under section 220(2) of the Income Tax Act, 1961, was a allowable deduction in computing the profits of the assessee ?
(4) Whether, on the facts and in the circumstances of the case, the section 40A(5) is applicable to the remuneration paid to directors of the assesses company ?"
2. Question No. 1 is at the instance of the revenue and question Nos. 2 to 4 are at the instance of the assesses company.
3. The assessee is a private limited company. For the assessment year 1975-76, the assessee claimed depreciation under s. 32 of the I. T. Act in respect of capital assets purchased and continued to be utilised for scientific research during the previous years. The ITO disallowed the claim. In the appeal preferred by the assessee, em the AAC allowed the assessee claim relying on an order of the Tribunal in the case of M/s. Indian Telephone Industries. Being aggrieved by the order of the AAC, the Department preferred an appeal before the Tribunal, The Tribunal following its order in the case of M/s. Indian Telephone Industries, upheld the order of the AAC. But, it may be mentioned that the relevant clause in s. 35 has since been amended with retrospective effect from April 1, 1962, by Finance (No. 2) Act, 1980 and as a consequence the assessee would not be entitled to any relief under s. 35 for the year subsequent to the data of purchase of the capital asset and utilised for scientific research. Question No. 1 has, therefore, to be answered in the negative and in favour of the Department.
4. Question No. 3 relates to the disallowance of interest paid under s. 220(2) of the I. T. Act, as an allowable deduction in computing the total income of the company. The ITO disallowed the claim and the AAc confirmed it, In further appeal by the assessee, the Tribunal also confirmed the disallowance.
5. The assessee's counsel has nothing much to say on this question, Apart from the decision of the Punjab & Haryana High Court in Commissioner of Income Tax Vs. Oriental Carpet Manufacturers (India) P. Ltd., (1973) 90 ITR 373 P & H, relied upon by the Tribunal, the High Courts of Bombay and Calcutta also have taken a similar view in Aruna Mills Ltd. v. CIT : [1957] 31 ITR 153 (Bom) and Balmer Lawrie and Co. Ltd. Vs. Commissioner of Income Tax, Calcutta, AIR 1960 Cal 360. There could, therefore, be not doubt, in view of the settled position in law, that the interest paid on account of delay in payment of tax cannot be regarded as having been incurred for business purposes. Question No. 3 must, therefore, be answered against the assessee.
6. Question No. 4 is covered by the decision of this court in International Instruments (P.) Ltd. Vs. Commissioner of Income Tax, Karnataka, (1981) 130 ITR 315 KAR, and hence it is to be answered in favour of the assessee.
7. We are thus left with only question No. 2 namely, whether surtax payable under the Companies Profits (Surtax) Act, 1964 (hereinafter referred to as the "Surtax Act") by the assesses company, is an admissible deduction in computing its business profits. The ITO disallowed that claim, but the AAC held it as an allowable de
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