The Commissioner Of Income Tax, Aurangabad v. Jai Ambika Sahakari Sakhar Karkhana Ltd

FARAD CONTINUATION SHEET NO.IN THE HIGH COURT OF JUDICATURE AT BOMBAYAPPELLATE SIDE, BENCH AT AURANGABAD. OfficeNotes,Office Court's or Judge's orders.MemorandaofCoram, appearance,Court's orders or directions and Registrar's orders. TAX APPEAL NO.: 17 OF 2008 The Commissioner of Income Tax, AurangabadVersusJai Ambika Sahakari Sakhar Karkhana Ltd.*** Mr. Alok Sharma, A.S.G. for the Appellant.Mr. Abhijit Choudhari, Advocate h/f Mr. D. J. Choudhari, Advocate for the Respondent. *** CORAM: D. G. KARNIK & S. B. DESHMUKH,JJ.DATED: 7th FEBRUARY, 2012. ORAL ORDER [Per D.G.Karnik, J.] 1.The question of law on which the admission of the appeal is sought is: "Whether the amount paid/ provided in the books of account by the Assessee for contribution to Vasant Dada Sugar Institute, a recognised research institute, can be allowed as deduction under section 35 (1) of the Income Tax Act, 1961 as the amount has only been provided in the accounts but has not actually been paid in the relevant Assessment Year? 2.Respondent is a sugar factory located in State of Maharashtra. Vasant Dada Sugar Institute is a Research Association established with an object of undertaking scientific research in production of sugar and sugarcane. Most of the sugar factories in Maharashtra contribute a certain sum every year to VSI for scientific research. It is not in dispute that VSI is a Research Association which has as its object the undertaking of scientific research and the money paid to it is an allowable deduction under section 35 (1) of the Income Tax Act. 3.In the financial year 1999-2000 relatable to the assessment year 2000-2001 the Respondent made a provision of Rs.1,71,885/- in its books of accounts for contribution to be made to the VSI for the purpose of scientific research. The amount, however, was not actually paid during the relevant financial year. The respondent claimed the amount provided in its books of accounts to be paid to VSI for scientific reason as deduction under section 35 of the Income Tax Act. The Assessing Officer as well the C.I.T. (Appeals) disallowed the claim of deduction on the ground that the amount was not actually paid in the relevant financial year. On further appeal, the Income Tax Appellate Tribunal allowed the appeal of the assessee and allowed the deduction. That decision is challenged in this appeal. 4.Section 35 (1) of the Income Tax Act, 1961 (for short, "the I.T. Act") as it stood at the relevant time is quoted below: "35. Expenditure on scientific research. - (1) in respect of expenditure on scientificresearch,thefollowing deductions shall be allowed - (i)any expenditure (not being in the nature of capital expenditure)laidoutor expended on scientific research related to the business: [Explanation.- Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1[st] day of April, 1973) on payment of any salary [as defined in Explanation 2 below sub-section (5) of section 40A] to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the threeyearsimmediately preceding the commencement of the business shall, to the extent it is certified by the prescribed authority to have been laid out or expended on such scientific research, be deemed to have been laid out or expended in the previous year in whichthebusinessis commenced;] (ii) An amount equal to one and one-fourth times of any sum paid to a research association which has as its object the undertakingofscientific research or to a university, college or other institution to beusedforscientific research:" commenced;] (ii) An amount equal to one and one-fourth times of any sum paid to a research association which has as its object the undertakingofscientific research or to a university, college or other institution to beusedforscientific research:" (Subsections (2) to (5) of section 35 are not reproduced as they are not relevant for this appeal). 5.Under Clause (i) of Section 35 (1) of the I.T. Act, 1961 expenditure incurred on scientific research related to the business, is allowable as deduction. Under clause (ii) of section 35 (1) of the Act, the amount paid by an assessee to a Research Association, which has as its object the undertaking scientific research, is also allowable as deduction to the extent of one and one fourth times of the amount so paid. The word "Paid" appearing in sub clause (ii) of section 35 (1) of the I.T. Act is defined under section 43 of the I.T. Act. Section 43 of the I.T. Act, insofar as it is relevant, reads as under: "43. In sections 28 to 41 and in this section, unless the context otherwise requires - (1) ... ... ... (2)"paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession". 6.For the purpose of Sections 28 to 41 of the I.T. Act, "Paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and Gains of business of profession". The word "Paid" appearing in sub clause (ii) of Section 35 (1) does not mean that the amount must be actually spent but it includes the amount which has been provided for as a liability incurred in the books of accounts of the assessee if the assessee maintains the books of accounts on a mercantile basis. 7.In the mercantile system of accounting for any and every income earned or amount received or amount receivable a credit entry is made in the books of accounts by the assessee irrespective of whether the payment is actually received or not. The entry is made the moment the right to receive accrues, though the actual receipt may be postponed either because of credit provided by the assessee or otherwise. If, ultimately, the amount which is so receivable is not received and the assessee, after due efforts of recovery, comes to a conclusion that the amount is irrecoverable or has become a bad debt, it rights off the amount by making an appropriate book entry. Similarly, for any and every liability incurred by the assessee a debit entry is made in its books of accounts the moment the liability is incurred, irrespective of whether the payment is made immediately or not. 8.The definition of the word "Paid" contained in section 43 (2) of the Act takes into account not only the amount which is actually paid by the assessee to a research institute but also takes into account the liability incurred and provided in the books of account in case mercantile system of accounting is followed. Consequently, the amount which has been provided for as a liability to be paid to a scientific research institute by the assessee is to be allowed as a deduction under section 35 of I.T.Act in a case where the assessee maintains its accounts on mercantile basis. 9.In the present case, it is not in dispute that the assess maintains the accounts on a mercantile basis. Hence, even a book entry made by the assessee in its books of accounts as a liability for making contribution to VSI, a Research Institute, would be covered by section 35 (1) (ii) of the I.T. Act. In our view, the Tribunal committed no error in holding that the assessee was entitled to deduction under section 35 (1) (ii) of the I.T.Act. 10.There is no merit in the appeal, which is hereby dismissed. 9.In the present case, it is not in dispute that the assess maintains the accounts on a mercantile basis. Hence, even a book entry made by the assessee in its books of accounts as a liability for making contribution to VSI, a Research Institute, would be covered by section 35 (1) (ii) of the I.T. Act. In our view, the Tribunal committed no error in holding that the assessee was entitled to deduction under section 35 (1) (ii) of the I.T.Act. 10.There is no merit in the appeal, which is hereby dismissed. [S.B.DESHMUKH, J.] [D.G.KARNIK, J.]Dt.07/02/2012ans/TA17-08 TAX APPEAL NO.: 17 OF 2008 Date of decision: 7th FEBRUARY, 2012. For approval and signature THE HONOURABLE SHRI JUSTICE D. G. KARNIK. THE HONOURABLE SHRI JUSTICE S. B. DESHMUKH. Whether Reporters of local papers...Yesmay be allowed to see the judgment?To be referred to the Reporter or not? ...YesWhether Their Lordships wish to see ... Nofair copy of the judgment?Whether this case involves a substantial... Noquestion of law as to the interpretation of the Constitution of India, 1950, or any order made thereunder? Whether it is to be circulated to the... NoCivil Judges?Whether the case involves an important ... Noquestion of law and whether a copy of the judgment should be sent to Nagpur,Goa and Bombay offices? [G. F. ANSARI]PRIVATE SECRETARY TO THE HONOURABLE JUDGE