Statutory deductions under income tax should be computed on total income before any specific deductions.

1At the instance of the Commissioner of Income tax, Trivandrum, the Income tax Appellate Tribunal, Cochin Bench, referred the following questions to this Court for decision:
1. Whether, on the facts and in the circumstanaces of the case, the Tribunal was right in holding that the statutory deduction under S.36(1) (viii) of the LT. Act 1961 has to be calculated on the total income before deduction of the amount allowable under S.36(1)(viii)? (Assessment years 1975-76 and 1977-78).
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest which had accrued to the assessee on the balance amount due from M/s. Malabar Spinning and Weaving Mills Co. Ltd., was not includible in the income of the assessee? (Assessment years 1976-77 and 1977-78).
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure incurred by the assessee on the investigation, research and feasibility study is a revenue expenditure to be allowed as a deduction? (Assessment years 1976-77 and 1977-78).

2The matter arises out of the income tax assessment on the respondent for the assessment years 1975-76, 1976-77, and 1977-78. The assessee in all the cases is the Kerala State Industrial Development Corporation Limited. The assessment for the assessment year 1975-76 was originally completed on 28-12-1977. The Income tax Officer computed the deduction under S.36(1)(viii) of the Income tax Act on the total income before allowing the deduction under S.36(1)(viii) itself. The said assessment was reopened by the Income tax Officer on the ground that deduction should have been allowed only on the total income as reduced by the deduction under S.36(1)(viii) of the Act. Re-assessment was made accordingly. The Commissioner of Income tax (Appeals) set aside the assessment. When the appeal came up for hearing before the Tribunal the assessee relied upon the subsequent decision of the Patna High Court reported in C.LT. v. Bihar State Financial Corporation, 142 ITR 518 wherein it has been held that the statutory deduction under S.36(1)(viii) should be calculated on the total income before deduction of the amount allowable under S.36(1)(viii) itself. Following the said decision the Tribunal upheld the order of the CLT (Appeals), though for different reasons. The first question extracted above related to this aspect for the years 1975-76 and 1977-78.

3With regard to the assessment year 1976-77 the Income tax Officer included in the income of the assessee a sum of Rs. 4,70,984 being the interest which accrued on the balance due to the assessee from M/s. Malabar Spinning & Weaving Company Limited. Similarly for the assessment year 1977-78 an addition of Rs. 6,57,260/- was made by way of interest due to the assessee from the said Company, namely, M/s. Malabar Spinning & Weaving Company Limited. The Income tax Officer rejected the contention of the assessee that the amount should not be treated as income as there is no chance of recovering the same. As regards the assessment year 1976-77 the addition was confirmed by the CIT (Appeals), but the addition was deleted by the CIT (Appeals) with regard to the assessment year 1977-78. On appeal, the Tribunal found that the assessee was fully justified in taking up the stand that there is no chance of recovering interest on the loans advanced by the assessee. On appreciation of the facts the Tribunal further held that the interest amount is not includible in the income as it has not accrued an income at all. The question No. 2 referred to above rleated to this aspect for the assessment years 1976-77 and 1977-78.

4During the assessment years 1976-77 and 1977-78 the assessee claimed deduction of a sum of Rs. 3,02,067/- and Rs. 3,32,603/respectively as expenditure incurred on investigation, research and feasibility study. This was disallowed by the Income tax Officer, but was allowed by the CIT (Appeals) following the decision of the Tri