2012 (8) TMI 82 - AT - Income Tax

Allowability of deduction in respect of write off of advances - assessee had participated in promotion of EECL, in order to safeguard its business of explosives and detonators in West Bengal Held that - Advances made by the assessee to EECL is incidental to carrying on the business by the assessee itself and consequently, the borrowed money should be considered as having been utilized for the purpose of business of the assessee - advances, thus, having been made in the normal course of business of the assessee, when written off, have to be held as falling in the revenue field, and consequently, such amounts of advances written off, are allowable as deduction either as bad debt or as business loss, incidental to carrying on the business by the assessee In favor of assessee Deduction in respect of amount advanced to a sick company Held that - There is only the order of BIFR to wind up the EECL, but the EECL has not been actually would up by that date - Loss on account of investment in the shares of EECL cannot be considered in the year under appeal, and the same can be considered only in the year in which the EECL has actually been wound up or the rights of the shareholders are extinguished Expenditure in R&D - assessee had an approved R&D Unit, approved by the Government, even though the approval for the current year was not produced Held that - question whether any part of the expenditure claimed, constituted the expenditure on scientific research or not, has to be referred to the prescribed authority, in terms of Explanation below the provisions of S.35(1) of the Act - issue is remitted back to the file of the assessing officer - assessee s appeal is partly allowed.

Summary

Issues Involved:
1. Allowability of deduction for advances written off.
2. Allowability of deduction for investment in shares written off.
3. Allowability of deduction for R&D expenditure.

Detailed Analysis:

1. Allowability of Deduction for Advances Written Off:

The assessee, involved in the manufacture and supply of explosives and detonators, advanced money to Eastern Explosives and Chemicals Ltd. (EECL) to retain its business in West Bengal. The advances totaled Rs.141.21 lakhs. EECL became a sick company and was ordered to be wound up by the BIFR on 31.3.1997. The assessee claimed the advances as a business loss under Sections 28/29 of the Income-tax Act, arguing that the advances were made to protect its business interests. The assessing officer disallowed this claim, but the Tribunal, applying the principle from S.A. Builders (280 ITR 1), held that the advances were made for commercial expediency and were incidental to the assessee's business. Consequently, the Tribunal allowed the deduction of Rs.141.21 lakhs as a business loss.

2. Allowability of Deduction for Investment in Shares Written Off:

The assessee also invested Rs.96 lakhs in the share capital of EECL, which was written off following the BIFR's order. The Tribunal noted that the investment was made for business purposes but was not held as stock in trade. Since the EECL had not been actually wound up by 31.3.1997, the Tribunal upheld the lower authorities' decision to disallow the deduction for the investment in the year under appeal. The loss could only be considered in the year when EECL was actually wound up or the shareholders' rights were extinguished.

3. Allowability of Deduction for R&D Expenditure:

The assessee claimed Rs.79,04,376 as R&D expenditure for mobile R&D units installed in trucks. The assessing officer disallowed this claim, noting the absence of log books and a recognition certificate from the Government of India for the relevant period. The Tribunal observed that the assessee had an approved R&D unit and clarified that the expenditure on scientific research must be referred to the prescribed authority under Section 35(1) of the Act. The Tribunal remitted the issue back to the assessing officer to refer the matter to the prescribed authority and make any disallowance based on their certification.

Conclusion:

The Tribunal allowed the deduction for advances written off, disallowed the deduction for investment in shares written off for the year under appeal, and remitted the issue of R&D expenditure back to the assessing officer for further action. The appeal was partly allowed.