JUDGMENT
1. The Income-tax Appellate Tribunal, Allahabad, has referred the following question of law under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), for opinion to this court :
“Whether, on the facts and in the circumstances of the case, the Tribunal was, in law, justified in allowing the relief on account of depreciation on capital expenditure on the cost of machinery and plant used for carrying out research and development ?”
2. The reference relates to the assessment year 1982-83.
3. Briefly stated the facts giving rise to the present reference are as follows :
4. The respondent/assessee is a Government of U. P. undertaking and has been set up with the basic object of promoting and developing electronic industries in the State of U. P. In the beginning it set up a factory at Allahabad and Lucknow to manufacture black and white T. V. sets. With effect from April 1, 1987, the State Government created certain separate Corporations. The factories owned by the respondent-Corporation were transferred to the different Corporations set up by the State Government namely, Uptron, Uptron Digital Systems, Uptron Communications and Instruments Corporation, etc. These corporations were wholly owned subsidiaries of the respondent/assessee. After the transfer of the factories the respondent/assessee was engaged mainly in the work of research and development. The results of such research and development were used by the factories which were wholly owned subsidiaries. It may be mentioned here that apart from the research work, the respondent-Corporation was also engaged in providing consultancy services for which during the year under consideration it had received a sum of Rs. 6,72,992 as fee. It had also received Rs. 3,03,000 from the State Government for preparing feasibility reports. Apart from it, it had also received a sum of Rs. 6,46,300 from the promotion and development of electronic industry in the State. It claimed deduction of Rs. 19,23,250 under Section 35 of the Act which related to the expenditure on scientific research. Out of the aforesaid amount a sum of Rs. 15,83,208 related to the expenditure for the year under consideration and balance related to the earlier years, which were claimed as revenue expenditure, but later on written back. The Assessing Officer examined the books of account and the claim put forward by the respondent/assessee in this respect. According to him relief can be given if the income was assessable under the head “Business and profession” and as the respondent/ assessee derived income from other sources, no such expenditure incurred on scientific research under Section 35 of the Act was allowable. The Assessing Officer was further of the view that the respondent/assessee was engaged in the business of investment and sale of investment, etc., and the activities would be in the nature of holding company and manufacturing activities was being carried on by its subsidiary companies and, therefore, the claim cannot be allowed. Feeling aggrieved the respondent preferred an appeal before the Commissioner of Income-tax (Appeals), who has confirmed the disallowance of Rs. 15,83,209. Still feeling aggrieved the respondent/assessee preferred a second appeal before the Tribunal. The Tribunal after taking into consideration the material and evidence on record had allowed the claim of the respondent/assessee. The Tribunal has held that the subsidiary companies have not made any claim of deduction under Section 35 of the Act on the expenditure incurred by the respondent/ assessee on scientific research. It had further found that the objects for which the respondent/assessee was established were to promote and develop electronic industry to establish the companies’ associations, etc., for taking over or conducting electronic industrial enterprises of any description and take over the management of electronic industrial units and to undertake and carry on all kinds of business relating to the research and development and manufacturing relating to the field of electronics. It had further found that the respondent had been recognised by the Government of India, Department of Science and Technology, and the period of recognition had been extended up to March 31, 1985. Thus it concluded that the respondent/assessee was carrying on the research and development operation. The Tribunal also noticed that the respondent’s main source of income was consultancy charges which were recovered for the preparation of feasibility reports for setting up electronic industries in the State and it was for that purpose that such research and development work was carried on in the field of T. V., telecommunications and other electronic components. On these findings the claim put forward by the respondent/assessee was held to be admissible and justified.
5. Heard Sri Shambhu Chopra, learned standing counsel for the Revenue, and Sri Satish Mandhyan for the respondent/assessee.
6. Learned standing counsel submitted that as the respondent had sold off/ transferred all its factories to its subsidiary companies, it ceased to do any business and, therefore, the expenditure incurred on research and development was not admissible under Section 35 of the Act. According to him for claiming allowance of expenditure on scientific research under Section 35 of the Act, the sine qua non is carrying on the business as the expenditure laid out or expended on scientific research should relate to the business. As no business was being done and the income was mainly from other sources and sale of investments, the Tribunal has committed an error in upholding the claim under Section 35 of the Act.
7. Sri Satish Mandhyan, learned counsel appearing for the respondent/ assessee, has submitted that even after the transfer of the factories to its subsidiaries, the respondent/assessee was engaged in providing feasibility reports for establishment and development of various electronic industries in the State of U. P. and had received consultancy fee for the services rendered by it. Thus, it was engaged in the business and, therefore, entitled for the allowance of expenditure on scientific research under Section 35 of the Act.
8. Having heard learned counsel for the parties, we find that the expenditure on scientific research under Section 35 of the Act is allowable only when such expenditure is laid out or expended or related to the business. The term business is to be given a wide meaning and with the rapid advancement and growth in the field of science and technology even the consultancy services offered would be covered under the term business. These days providing consultancy is the major source of revenue and it is not all required to confine the term business to mean only sale and purchase of merchandise or manufacturing activities. It is not in dispute that the respondent/assessee had derived income from consultancy services, preparation of feasibility report and other connected activities. Thus it had carried on business during the assessment year in question and was entitled for allowance of the expenditure incurred on scientific research which was related to its business.
9. In view of the foregoing discussion, we do not find any legal infirmity in the order of the Tribunal. We accordingly, answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. There shall be no order as to costs.